When the Wolves Bite by Scott Wapner

Author:Scott Wapner
Language: eng
Format: epub
Publisher: PublicAffairs
Published: 2018-04-24T04:00:00+00:00

10

THE EXIT AND THE PILE-ON

By the middle of winter 2013, Icahn’s emergence had helped push Herbalife shares back into the high $40s, hardly where Ackman thought they’d be just two months into his public campaign. Nevertheless, he remained steadfast that the story—and the trade—would eventually break his way.

On one frigid winter evening, it looked like it might.

On Saturday, February 16 at around 6:20 p.m. New York time, I stood on the darkened and quiet corner of East 65th Street and Park Avenue in Manhattan and broke the news, via an email, that, according to a source, Dan Loeb had started liquidating his Herbalife position. The selling had started a few weeks ago, I said in my report, which made no mention of exactly how many shares Loeb had dumped or the amount that remained in his fund.

It was surprising news to say the least.

Just six weeks prior, on January 9, Loeb had declared Herbalife a “compelling long-term investment” for his firm, Third Point, and said in a letter to his investors that “shares could be worth $55 to $68,” representing a major jump from where he’d originally stepped in and bought the stock.1 Now he was suddenly selling?

To Ackman the move looked like a classic pump and dump scheme, where an investor buys a stock, publicly pushes it up, then sells it soon after for a healthy profit. Loeb laughingly denied that claim months later during an interview with Andrew Ross Sorkin of the New York Times, saying that when Herbalife shares had reached nearly $44, the opportunity to sell was simply too good to pass up.

“That, for us, was a gift; we decided to take the money and run,” Loeb told Sorkin. “There was no pump and dump.”2

Three days after my report that Loeb had started selling down his stake, investors once again got a better look under Herbalife’s hood. On Tuesday, February 19, shortly after 5 p.m. Eastern time, the company released its earnings report, which handily beat expectations. More important, the company raised its outlook in a sign of just how strong the business had been performing of late. On the earnings call the following morning, CEO Michael Johnson said as much to the analysts who’d dialed in.

“As we reported yesterday,” Johnson said, “Herbalife enjoyed broad-based strength around the world. More specifically, in 2012 we achieved the following financial results: a record $4.1 billion in net sales, a record $4.7 billion in volume points, a record $736 million of EBITDA [a key metric of earnings], a record $477 million in net income, and a record $4.05 of Earnings per shares.”3

Johnson also addressed Ackman, though not by name.

“Additionally, as noted in our press release,” said Johnson, “our guidance excludes certain one-time costs, mostly legal and advisory services associated with our response to information put forth by a short-seller. The costs are currently expected to be between ten and twenty million dollars.”4

Johnson also said he’d spoken to Icahn briefly, calling the discussions “short” with “nothing concrete to report.”5 Johnson

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