Herbalife Ltd. (HLF:US) agreed to add two board members chosen by Carl Icahn and allow him to boost his stake to as much as 25 percent, escalating the billionaire investor’s feud with rival hedge fund manager Bill Ackman.
The board will expand to 11 from nine members, the Cayman Islands-based company said yesterday in a statement. Herbalife said Icahn had a 13.6 percent stake in the company, up from the 13 percent he reported last month.
Icahn said when he disclosed his investment on Feb. 14 that he would seek talks with the company about strategic alternatives, including taking it private. His stake pits him against Ackman, who has sold short 20 million shares of the company and argued that its multi-level marketing structure is a pyramid scheme that regulators should shut down.
“Ackman has given us an opportunity to buy a company cheaply at a discounted price,” Icahn, 77, said yesterday in an interview with Trish Regan on Bloomberg Television. “They are in 87 countries and it is an opportunity for unemployed people in these countries to make money. I think it’s a really good product.”
Icahn said he doesn’t yet know whether he’ll buy more shares at their current price and that he doesn’t plan to micromanage the company.
Herbalife rose percent to $40.39 at 9:56 a.m. in New York. The shares (HLF:US) gained 22 percent this year through yesterday, while the Standard & Poor’s 500 Index advanced 6.2 percent.
Herbalife President Des Walsh said on Feb. 27 that the company would “certainly” consider going private in a buyout “in the right circumstance.”
“There are many people who believe that obviously the value of the company is not represented by where the stock price is today,” Walsh said in an interview. “So some people have actually said that this is a company that actually would thrive in a private situation.”
Ackman, founder of New York hedge fund Pershing Square Capital Management LP first disclosed his bet against Herbalife on Dec. 19 and a day later appeared at a Sohn Investment Conference in New York, accusing Herbalife of using inflated pricing, misleading sales information and a complicated incentive structure to hide a pyramid scheme.
In a short sale, an investor borrows stock and then sells the shares in anticipation of returning them at a lower price in the future.
Ackman didn’t return messages seeking comment on Icahn’s announcement.
Herbalife executives and consultants hit back at Ackman on Jan. 10, arguing that all of Herbalife’s payments to distributors are tied to product sales and the company’s accounting practices are legal.
U.S. regulators at the Federal Trade Commission and the Securities and Exchange Commission have declined to say whether they are investigating Herbalife or intend to do so.
“With every percentage point step forward in Icahn’s march to 25 percent ownership, the vice tightens around Ackman’s position,” said hedge fund manager Robert Chapman of Chapman Capital LLC, which holds a long position in Herbalife. “Between Herbalife’s excellent operating performance and its shrinking float of shares, it’s gonna get gory.”
While yesterday’s announcement suggests Icahn will hold greater sway at Herbalife, a full acquisition may not be in the cards, Thomas Graves, New York-based equity analyst at S&P Capital IQ, said in a telephone interview.
“It’s gotten people’s hopes up that there’s going to be a recapitalization or an accelerated stock-repurchase plan,” Graves said. “At this point, I’m not looking for Mr. Icahn to launch a full acquisition of Herbalife.”
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