News Column

Herbalife's Share Repurchase Gets Mixed Reaction

February 4, 2014

Richard Craver, Winston-Salem Journal

Feb. 04--A microcosm of Herbalife Ltd.'s economic, legal and reputational fight boiled to the surface Monday with the company's latest maneuvers to bolster shareholder confidence.

The company offered a preview of its fourth-quarter earnings report, saying adjusted diluted earnings would be in the range of $1.26 to $1.30 a share. The report is to be released Feb. 18.

The average earnings forecast is $1.17 by three analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.

Herbalife said net sales would be up nearly 20 percent for the quarter and 18.5 percent for fiscal 2013.

Herbalife is raising the value of its share-repurchase program by 50 percent to $1.5 billion, and providing up to $1 billion in convertible notes to help pay for the offering.

Investor reaction to the announcements took Herbalife's share price on a roller coaster ride. After opening at $64.37, it fell as much as 3.5 percent to $62.12, only to rally in the last 40 minutes of trading to finish at $69.02, up 7.2 percent.

The share price is down 17.4 percent since Jan. 10, but up 123 percent from its 52-week low of $30.84.

The announcements also served as Herbalife's latest counterpunch to the attempt by hedge-fund activist Bill Ackman to discredit it as a Ponzi scheme.

In December, a Belgian court of appeals overturned an earlier decision that found the company was operating a pyramid scheme.

Ackman launched his public attack on Dec. 19, 2012 -- the same day Herbalife announced it was buying the former Dell Inc. plant in Winston-Salem. Ackman has had as much as $1.5 billion at stake in his short portion on Herbalife.

Ackman upped his ante Monday by launching a new website -- www.herbalifepyramidscheme.com.

Jamie Dlugosch, an analyst with Traders Reserve, said Herbalife is "market manipulation at its worst."

"The little guy has to trust that Wall Street is a fair place to operate and that financial statements are to be relied upon," Dlugosch said.

"If we can trust those financials at Herbalife, the company looks to be a really great investment opportunity. ... but would you put your money in, given the manipulation surrounding the stock?

"The well has been poisoned, and anyone investing in Herbalife today is simply rolling the dice."

Herbalife is attempting to portray the company in a better financial light in the aftermath of a request by U.S. Sen. Edward Markey, D-Mass., for federal regulators to investigate Herbalife. The Federal Trade Commission confirmed Monday its chairwoman, Edith Ramirez, will meet Wednesday with the League of United Latin American Citizens to discuss Herbalife's business practices.

Since Ackman's accusations surfaced, local government and economic officials have said they are paying attention to, but staying at arm's length from, the accusations. The company is getting local and state assistance with the project.

Herbalife has said it is on pace for opening the $130 million manufacturing plant this year, although at a slower hiring pace for 493 full-time employees than was projected in June. Spokesman Julian Cacchioli said the company had hired 60 employees by the end of 2013. It expects to complete hiring by the end of 2015.

The company has spent $347 million on the initial $1 billion share-purchase authorization at a rate of about $50 million a quarter.

Bloomberg News reported the offering of $1 billion in notes can be converted to shares if the stock rises at least 25 percent.

"They certainly have plenty of cash flow to fund a buyback effort, but by taking on debt that gives them the ability to accelerate the effort," Rommel Dionisio, an analyst for Wedbush Securities, told Bloomberg.

"This gives them another tool for taking advantage of a stock price below where they believe it should be trading. This is a company putting its money where its mouth is, and it should be viewed as a positive move."

The strategy struck another analyst as risky.

"Ostensibly, this flurry of news may look good for Herbalife long investors," said Matt Stewart, a contributor to SeekingAlpha.com, a financial-research company. "Longs have been awaiting a debt deal to finance a levered recapitalization for quite some time now."

However, Stewart said the decision on the notes may be a sign of weakness for Herbalife since it is not borrowing the money from a bank or selling bonds to institutional investors.

"What investors are left to digest is the following: Herbalife is issuing $1 billion worth of notes to buy back stock so that the notes can then be converted at some later date to reissue stock," Stewart said.

"Herbalife is now a levered entity with very little collateral on its balance sheet. Equity holders now find themselves decidedly subordinate to the company's bank group and noteholders."

rcraver@wsjournal.com

(336) 727-7376

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Original headline: Reaction mixed to Herbalife's updated share-repurchase program


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Source: (c)2014 Winston-Salem Journal (Winston Salem, N.C.)


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