HLF - Herbalife

[fareastwarriors]

http://www.bloomberg.com/news/2013-12-09/herbalife-turns-table-on-ackman-meeting-pershing-clients.html

 

 

Herbalife Turns Tables on Ackman Meeting Pershing Clients

[fareastwarriors]

http://www.bloomberg.com/news/2013-12-16/herbalife-auditors-find-no-changes-in-re-audits-correct-.html

 

 

Herbalife Clean Audit Won’t Deter Ackman in Pyramid Claim

[mcliu]

What I find intriguing is that the longs haven't really put out a compelling/definitive case that HLF isn't a ponzi scheme, such as data on end-user consumption, etc.. (Or am I missing something?)

 

Seems like most of the long case is based around accounting profits, capital structure optimization and a short squeeze.

 

I mean the whole audit/profitability doesn't really mean much since ponzi schemes can be highly profitable until they collapse..

[ZenaidaMacroura]

What I find intriguing is that the longs haven't really put out a compelling/definitive case that HLF isn't a ponzi scheme, such as data on end-user consumption, etc.. (Or am I missing something?)

 

Seems like most of the long case is based around accounting profits, capital structure optimization and a short squeeze.

 

I mean the whole audit/profitability doesn't really mean much since ponzi schemes can be highly profitable until they collapse..

 

 

If you read the study that Ackman sites in his original presentation (the one co-authored by William Keep), Keep was interviewed by bloomberg right after the original report and although he had not a single good word to say about herbalife when they cut to the chase and asked if based on the presentation material he felt herbalife fit his definition of a ponzi/illegal pyramid, Keep said it did not based on the last errata (I think in 2004, where FTC said that being a distributor does NOT mean one cannot also be an end user).  Maybe the FTC feels differently now, but as far as precedence goes HLF is in the clear.  [edit: I found the errata and cited it in the following post, my memory served correct - it was 2004.]

 

At very least the burden is on the people saying that it is a ponzi scheme to prove it.  Or to get the FTC to revise their position because as it stands the guy who wrote essentially the "guideline" (taht both ackman and the FTC refer to) doesn't even agree with Ackman.

[ZenaidaMacroura]

Here is the thing Keep said prevented an Ackman "slam dunk":

 

In 2004, the FTC, in a FTC Staff Advisory Opinion and Pyramid Schemes Analysis, responded to an inquiry from the Direct Selling Association, intending to clarify that the FTC did not view "personal use" as the primary determinant of illegality, but rather whether purchases of goods and services were "merely incidental" to "buying in" to the opportunity. In fact, all of its cases have focused on this point.

In its 2004 "clarification letter," the FTC noted:

 

  Internal Consumption

 

    Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme, The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture. …

 

  It is important to distinguish an illegal pyramid scheme from a legitimate buyers club. A buyers club confers the right to purchase goods and services at a discount. If a buyers club is organized as a multi-level reward system, the purchase of goods and services by one's downline could defray the cost of one's own purchases (i.e., the greater the downline purchases, the greater the volume discounts that the club receives from its suppliers, the greater the discount that can be apportioned to participants through the multi-level system). The purchase of goods and services within such a system can, therefore, be distinguished from a pyramid scheme on two grounds. First, purchases by the club's members can actually reduce costs for everyone (the goal of the club in the first place). Second, the purchase of goods and services is not merely incidental to the right to participate in a money-making venture, but rather the very reason participants join the program. Therefore, the plan does not simply transfer money from winners to losers, leaving the majority of participants with financial losses.

 

Edit: I underlined my emphasis.

[mcliu]

Yes, I understand the definition. Aside from the definition though, I would like to see some numbers, for example: Are distributors actually consuming Herbalife products? Are they consuming because they've prepaid for the products but cannot sell them are not stuck with them, or are they genuinely happy customers? How does the product fares vs. competitors?

 

Has anyone had experience with their products?

 

I mean, fundamentally, whether a business likes this will work or not derives from the value it provides to consumers, not on whether it's classified as a ponzi scheme or a buyer's club.

[ZenaidaMacroura]

Yes, I understand the definition. Aside from the definition though, I would like to see some numbers, for example: Are distributors actually consuming Herbalife products? Are they consuming because they've prepaid for the products but cannot sell them are not stuck with them, or are they genuinely happy customers? How does the product fares vs. competitors?

 

Has anyone had experience with their products?

 

I mean, fundamentally, whether a business likes this will work or not derives from the value it provides to consumers, not on whether it's classified as a ponzi scheme or a buyer's club.

The product is simply overpriced stuff that you could get for much cheaper if you forgo a "support" network.  I've seen it occasionally in places like "lifetime fitness" but never at, say, a Gold's Gym.

 

I think it's a lot like GNC in terms of its overpriced-ness - people will pay for the brand and association.  Funny thing, a former girlfriend became a "distributor" because doing so is about the only way you can get the product "directly" through the company.  I guess some people don't like buying stuff deeply discounted on Amazon/Ebay.  I've observed this type of behavior with cosmetics mainly...  Guess that explains why Saks/Neiman still do ok in that area.

[ZenaidaMacroura]

Strangely, most distributors are somewhat oblivious to ackman's crusade.  My guess is that an MLM participant is already desensitized to this sort of thing.  There seems to be a select group that will buy into this type of "opportunity."  There exists a host of serial MLM-ers.  I witnessed such a "gathering" while doing HLF research - there's something called "ACN" in houston.  Total wingbats.  It's like a church where high ranking members ostentatiously show-off their exotic autos, a lot of motivational memes in a slidedeck followed by a guest appearance by Donald Trump.  Celebrities add legitimacy even if they are paid figureheads... 

 

You know how people say value investing is probably an innate trait - you either get it or you don't?  I'd guess that the traits that make a value investor are the inverse of the traits that make MLM schemes seem appealing to a given individual - there are alot more of them than us. 

 

As for businesses succeeding only if they provide value - there are a host of businesses that get along just fine without providing any value whatsoever.  Without getting into the absorption issues and whether vitamins "work", I think the entire weight loss supplement market is bogus.  Maybe people buy it just to feel like they are making the effort.

[jschembs]

On a slightly different tangent, HLF's crusade targeting Ackman investors strikes me as a huge red flag for longs. If they truly had nothing to hide, why would they waste shareholder resources to attempt to convince Ackman's investors to withdraw funds? Perhaps that provides a near-term bump in the stock price as he is potentially forced to unwind his bet against the company, but that reeks of Allied Capital's campaign against Einhorn/Greenlight last decade.

[Mephistopheles]

On a slightly different tangent, HLF's crusade targeting Ackman investors strikes me as a huge red flag for longs. If they truly had nothing to hide, why would they waste shareholder resources to attempt to convince Ackman's investors to withdraw funds? Perhaps that provides a near-term bump in the stock price as he is potentially forced to unwind his bet against the company, but that reeks of Allied Capital's campaign against Einhorn/Greenlight last decade.

 

My thoughts exactly. Let's take the inverse: has anyone seen a legitimate, solid company do such a petty thing?

[ItsAValueTrap]

What Ackman is doing may be disruptive to Herbalife's business, e.g.:

1- FTC investigation.

2- Potentially harming Herbalife's reputation in the public by repeatedly calling Herbalife a pyramid scheme.

 

So I think that one could make a business argument for getting into a fight with Ackman.  It's not an obvious waste of shareholder money.

[Mephistopheles]

What Ackman is doing may be disruptive to Herbalife's business, e.g.:

1- FTC investigation.

2- Potentially harming Herbalife's reputation in the public by repeatedly calling Herbalife a pyramid scheme.

 

So I think that one could make a business argument for getting into a fight with Ackman.  It's not an obvious waste of shareholder money.

 

Agreed. But contacting Ackman's clients to influence them to pull their money out of his fund is a bit extreme. If they sued him for harming their reputation, that would make more sense (which I'm sure they have).

[ItsAValueTrap]

What Ackman is doing may be disruptive to Herbalife's business, e.g.:

1- FTC investigation.

2- Potentially harming Herbalife's reputation in the public by repeatedly calling Herbalife a pyramid scheme.

 

So I think that one could make a business argument for getting into a fight with Ackman.  It's not an obvious waste of shareholder money.

 

Agreed. But contacting Ackman's clients to influence them to pull their money out of his fund is a bit extreme. If they sued him for harming their reputation, that would make more sense (which I'm sure they have).

 

They could try to sue Ackman for libel but it would cost a lot in legal fees and they might lose.  I think contacting Ackman's clients is cheaper and may be more cost effective.  (But who knows.)

[fareastwarriors]

http://www.bloomberg.com/news/2014-01-23/herbalife-falls-as-senator-calls-for-probe-of-business-practices.html

 

 

Herbalife Falls as Senator Calls for Probe of Business Practices

[dcollon]

"For several months, Shane Dinneen, a member of our investment team since late 2007, has expressed interest in leaving Pershing Square to pursue other interests. As Shane is one of the most talented investment analysts I have ever worked with and someone I hold in high regard, I have done my best to convince him to stay with the firm. "

http://www.businessinsider.com.au/bill-ackmans-letter-about-shane-dinneen-2014-1

 

[fareastwarriors]

Ackman Says Herbalive Bet Carries Bigger Potential Gain

 

 

“We actually now have a much larger position notionally than we had initially,” Ackman said yesterday at the Harbor Investment Conference in New York. “If it were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation.”

 

 

http://www.bloomberg.com/news/2014-02-13/ackman-says-herbalive-bet-carries-bigger-potential-gain.html

 

 

 

[Matson125]

http://www.herbalifepyramidscheme.com/

 

I found each piece very interesting. What I find even more telling is that none of the people profiled or even Herbalife has called out Ackman on any information about them. 

 

 

[dcollon]

From NYT

Staking_$1_Billion_That_Herbalife_Will_Fail_Then_Lobbying_to_Bring_It_Down_-_NYTimes.pdf

[siddharth18]

I read it yesterday. It seems that the more people know about the fact that it's a billionaire who stands to profit from HLF, the more people revile him and his tactics. An article outlining his shady lobbying efforts (sending out identical letters on different letterheads or using victims' name without their consent) on the front page of one of the most popular newspapers in the world - isn't helping. That article screams market manipulation by a very rich guy who wants to become even richer at the expense of a company/jobs, etc.

 

And which politician (in the eyes of the masses) would like to be seen as helping a rich billionaire hedge-fund manager just because he stands to profit off of it?

 

You would think that if HLF were running an illegal pyramid scheme, someone, somewhere would've acted right? With each act, Ackman is just coming off as desperate.

[fareastwarriors]

Ackman’s Battle to Bring Down Herbalife

 

 

 

http://dealbook.nytimes.com/2014/03/10/morning-agenda-ackmans-battle-to-bring-down-herbalife/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=Morning%20Agenda&action=Click&pgtype=Blogs&region=Body&_r=0

[Guest 50centdollars]

Herbalife Comments On FTC Inquiry

 

PR Newswire

1:38 PM Eastern Daylight Time Mar 12, 2014

LOS ANGELES, March 12, 2014 /PRNewswire/ -- Herbalife (NYSE: HLF) announced it received today a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC).  In response, Herbalife issued the following statement:

 

Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC.  We are confident that Herbalife is in compliance with all applicable laws and regulations.  Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years. 

 

Herbalife does not intend to make any additional comments regarding this matter unless and until there are material developments.

 

 

[fareastwarriors]

http://www.bloomberg.com/news/2014-03-12/herbalife-discloses-civil-investigation-by-ftc.html

 

 

Herbalife Discloses Civil Investigation by FTC

[Aberhound]

Shorts who expose frauds or unlawful businesses are doing a public service. I care not that they profit or have good contacts. Governments have both good and bad employees but do not have the resources to focus on one idea like hedge funds. A person who risks his own capital wouldn't do so unless he has good reason.

 

Government employees in contrast should be banned from ever working in the private sector and should have strict rules preventing them from otherwise profiting from their regulatory acts. If there is wrongdoing here it is on the government side for failure to enact such rules. Perhaps Ackman is exploiting such a regulatory failure. I don't know. Even so, the fault is with Congress, not the business person who acts in accordance with the laws as written.

[ni-co]

I am a bit late to the HLF party but I found that post to be very interesting (especially taken together with all the other legwork John Hempton has done so far):

http://brontecapital.blogspot.ca/2014/03/herbalife-internal-consumption-comment.html

 

He sums it up in a comment under this post:

The ingredients in a [Herbalife] shake are Soy Protein Isolate and a few other things to get you to drink it (notably flavours).

The most important special ingredient however is the community group to get you to drink it. That is Herbalife's real model.

 

Might it be possible that Ackman simply overlooked that "distributers" in HLF's case are real consumers joining a weight loss community? Makes me wonder whether the question "Are these products sold to "real" customers or "consumed" by "distributers"? (aka the "Einhorn Question") is the wrong question to ask (Einhorn obviously decided not to short HLF which is rarely mentioned in any of the bull/bear battle articles). Neither Ackman nor Hempton deny that 80 % of the product is "consumed" by the lowest level of distributers in the chain.

 

Trying to leave aside all the noise surrounding this "billionaire hedge fund battle", the relevant question to me is whether this is real consumption or simply stockpiling/destroying inventory. I haven't read any convincing argument for the latter and John Hempton has some very good arguments against it (that I haven't seen being disproven yet):

http://brontecapital.blogspot.de/2013/07/it-was-night-before-christmas.html

 

To me, HLF seems to be very interesting from a risk/reward perspective: I can easily see HLF trading at multiples of its current market cap (3-4x) two or three years out in the case of Ackman beeing wrong vs going to zero in the case of him being right. I see no need to turn to LEAPs here, thereby introducing unnecessary time pressure into this.

 

Makes me also wonder why HLF is not more heavily discussed, here. Any thoughts?

[ZenaidaMacroura]

(Einhorn obviously decided not to short HLF which is rarely mentioned in any of the bull/bear battle articles).

Actually I think einhorn was short a small amount of HLF but covered into initial media circus.

 

This was one of my largest positions last year (mostly through a call spread), which expired in the money in a timely fashion.  t I don't think it is a pyramid scheme based on the 2004 advisory and have since reinitiated a small position around the current trading price.  I'm hoping to make it a more significant position on the heels of another Ackman push.