Bloomberg News

Herbalife in Investor Meeting Says Ackman Pyramid Case Wrong

January 10, 2013

Herbalife Ltd. (HLF:US) Chief Executive Officer Michael Johnson accused hedge fund manager Bill Ackman of “gross mischaracterizations” about the nutrition company’s direct-selling model as Herbalife executives mounted a point-by- point defense for investors.

“Don’t believe everything you hear,” Johnson said. “We’ve got a great company, and we’re moving forward with it.”

Johnson and his executive team gathered today at the Four Seasons Hotel in New York for a special meeting aimed at rebutting Ackman’s claims that Herbalife is a pyramid scheme. Herbalife is retail-oriented, sells products with unique ingredients and spent $44 million last year on science and technology, executives said during the presentation.

When asked if the company may consider going private, Johnson said he “likes” being a public company. Earlier in the presentation, he said he is confident in the future of Herbalife.

The shares declined 1.8 percent to $39.24 at the close in New York. They have fallen 7.7 percent since Dec. 18, the day before Ackman disclosed he had shorted more than 20 million shares of Herbalife’s stock.

“The impact from our presentation will take time to see,” Chief Financial Officer John Desimone said in a presentation after the meeting.

Accounting Practices

During a two-and-a-half hour presentation and question session, executives and consultants argued that all of Herbalife’s payments to distributors are tied to product sales and the company’s accounting practices are legal.

Anne Coughlan, a marketing professor at Northwestern University’s Kellogg School of Management, said her analysis of the company and questioning of executives convinced her its model showed none of the signs of a pyramid scheme. Johnson said he gave Coughlan, a paid consultant, freedom to explore all areas of the company.

Herbalife does not require an “unduly high” and “non- refundable” registration fee, Coughlan said. Nor does it require a large initial inventory purchase. The company offers a return provision and invests in the development of its products and distribution system, she said. Direct-selling, used by companies including Arbonne, Pampered Chef Ltd. and Avon Products Inc. (AVP:US), is a legitimate distribution model, she said.

A key distinction between a pyramid scheme and a multilevel marketing operation is how much compensation is linked to recruiting new salespeople, said Bill Keep, the dean of business at the College of New Jersey.

Nutrition Clubs

“If they can demonstrate they are not a pyramid scheme, they would be the kind of company that a lot of people would like to be like,” Keep said in an interview on Bloomberg Television.

Herbalife President Desmond Walsh took issue with Ackman’s criticism of nutrition clubs, where members pay a fee to sample drinks and get weight-loss support. While the clubs might not look like places found in New York’s wealthy Westchester County, Walsh joked, they’re important to consumers, distributors and the company.

“What was most offensive to us was the sad depiction of nutrition clubs,” Walsh said.

Changes may be made within months to the terminology used to describe what are now called ’’distributors,’’ Walsh also said in the interview. The term has created confusion because not all distributors sell products to consumers, he said. Many buy for personal use, so they may get a new designation when the changes take place, Walsh said.

Einhorn Questions

Herbalife has been embattled since May, when hedge fund manager, David Einhorn of Greenlight Capital Inc., asked questions about disclosure on a conference call, sending the stock lower. In December, Ackman, who runs Pershing Square Capital Management LP, announced he was shorting the shares.

Ackman’s short position has set off a battle between hedge fund managers.

Daniel Loeb’s Third Point LLC disclosed yesterday that it took an 8.2 percent stake in Herbalife. With about $10 billion under management as of Dec. 31, Third Point has purchased 8.9 million Herbalife shares, according to a regulatory filing.

Loeb and Ackman have been on opposite ends of a trade before. Third Point had bet against J.C. Penney Co., which Ackman’s Pershing Square holds a stake in, according to a person with knowledge of the hedge fund’s holdings. Elissa Doyle, a spokeswoman for Third Point, didn’t return e-mails or telephone messages seeking comment.

‘Monster’ Bet

Hedge fund manager Robert Chapman of Chapman Capital LLC made a “monster long bet” on Herbalife after Ackman’s allegations, according to a Chapman blog post.

On Dec. 20, Ackman, 46, went public with a three-hour presentation, accusing Herbalife of using inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme.

Ackman’s conclusions center on the company’s network of 3 million distributors in at least 85 countries who sell vitamins, shake mixes and skin gels. Those independent contractors earn revenue by hawking products directly to customers and recruiting new distributors, for which they earn a share of those sales and incentives from the company.

Ackman said today in a statement that Herbalife “distorted, mischaracterized, and outright ignored” major portions of its presentation.

Pershing Square will release a list of questions for Herbalife and will address new information about Herbalife’s practices in an updated presentation, he said.

To contact the reporter on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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Companies Mentioned

  • HLF
    (Herbalife Ltd)
    • $43.25 USD
    • -0.14
    • -0.32%
  • AVP
    (Avon Products Inc)
    • $9.78 USD
    • 0.07
    • 0.72%
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