Bloomberg News

Stiritz Sides With Icahn for 22% Surge in Herbalife Bet: Retail

September 18, 2013

Herbalife Ltd. Headquarters

The Herbalife Ltd. logo is displayed outside of the company's corporate headquarters in Torrance, California. Photographer: Patrick Fallon/Bloomberg

Bill Stiritz paid scant attention to Herbalife Ltd. (HLF:US) until a televised smackdown in January between billionaire hedge-fund activists Carl Icahn and Bill Ackman, who claims the nutrition company is a pyramid scheme. Icahn’s rebuttal convinced Stiritz to take a closer look.

Stiritz, chief executive officer of Raisin Bran maker Post Holdings Inc. (POST:US), began buying Herbalife shares and researching the company. He even signed up as a distributor of protein shakes and supplements, paying $55 to get access to contracts and sales materials. Before long, he was Herbalife’s fourth-largest shareholder with a more than 5.2 percent stake, financed with about $250 million of his own money. Since Sept. 3, the day Stiritz disclosed his holdings, Herbalife has jumped 22 percent.

A private man with a 54-year history in the food industry, Stiritz, 79, said he dove in once he decided Herbalife was a “national treasure” and that Ackman was trying to destroy it. Since his disclosure, Stiritz has added to his stake and plans to buy more shares, he said today.

“I’ve never heard someone come in and say, ‘This company ought to go away,’” he said in an interview last week at his red brick mansion in suburban St. Louis. “That is a thesis that really bothers you. How could you possibly say this is not a real business? It blows your mind.”

Besides an aversion to Ackman’s style of activism, Stiritz said he has faith in Herbalife’s management and has long seen protein shakes -- one of the company’s signature products -- as a low-cost way to curb obesity.

Pyramid Scheme

Ackman, whose Pershing Square Capital Management LP sold short at least 20 million Herbalife shares, has accused it of swindling unsophisticated consumers with false get-rich promises using overpriced products that hide a pyramid scheme. He has urged U.S. regulators, elected officials and community activists to help shut it down.

Operators of pyramid schemes typically seek to make money by recruiting new members who pay fees to existing members rather than relying on just the sale of goods and services. The Federal Trade Commission has said modern pyramid schemes can use products to hide their true intent.

Ackman’s most recent salvo came in a 52-page letter on Aug. 29 to Herbalife’s auditor, PricewaterhouseCoopers LLP, in which he urged PwC to pay attention to “serious accounting and disclosure issues.” Nine days earlier, Ackman reported to his investors that Pershing had made “material progress in attracting Federal, State and international regulatory interest in Herbalife” without elaborating.

Investigation Request

Elected officials and groups including the Latina organization MANA have written to Federal Trade Commission Chairwoman Edith Ramirez asking it to investigate Herbalife.

“There have been far too many troubling claims about Herbalife this year and with more conflicting issues continuing to come up, we strongly encourage the Commission to carry out a full investigation and thoroughly examine this company’s practices as soon as possible,” MANA President Alma Morales Riojas said in an Aug. 29 letter.

“When an investor with the track record of Bill Stiritz invests in a pyramid scheme, unfortunately it will only be the reputation of the pyramid scheme that remains intact,” Ackman said in a telephone interview.

In response, Stiritz said: “I haven’t invested in a pyramid scheme. It’s my money versus his investors’ money. May the best analyst win.”

Denied Claims

Herbalife has repeatedly denied Ackman’s claims. In a sign investors are largely unpersuaded by the allegations, the shares have more than doubled this year to $73.29 as of yesterday, an all-time high, and had increased 72 percent since the day before Ackman disclosed his short on Dec. 19. The stock was little changed today in New York trading.

“The company believes Mr. Stiritz’s views reflect the inherent value of Herbalife’s products, operations, and future prospects,” Barb Henderson, a company spokeswoman, said in an e-mailed statement. “He conducted his own research on Herbalife and our business before making his investment which we believe recognizes our ability to increase revenues and returns for our shareholders.”

Herbalife’s balance sheet, strong cash flow and promising sales momentum, even in the face of attack, are proof Herbalife is a sustainable business, Stiritz said. Discussions with management, a medical doctor and equities analysts helped convince Stiritz the company won’t be taken down as a fraud.

Share Repurchase

Herbalife has said it may repurchase a significant number of shares and receive a clean bill of health from its new auditors by year’s end, Stiritz said. Both are signals that the company’s share price will soar, as uncertainty over Ackman’s assault dissipates amid Chief Executive Officer Michael Johnson’s strong defense of the company, he said.

Stiritz also talked to Anne Coughlan, a marketing professor at Northwestern University’s Kellogg School of Management, who Herbalife hired to investigate its business. Coughlan told analysts in a January presentation that Herbalife gave her freedom to roam and she found no signs of a pyramid scheme. Stiritz said he found Coughlan “highly credible.”

“This is a gem of a company,” he said. “We’re entering the end-game phase.”

Ackman said today that if Stiritz is willing to meet, “we can help him understand why Herbalife is a pyramid scheme.”

“The mistake that Mr. Stiritz made was to rely on a marketing professor paid by the company as well as bullish analysts in his determination that Herbalife is not a pyramid scheme,” Ackman also said today in a telephone interview.

Sniff Test

“My opinion isn’t for sale,” Coughlan said in a telephone interview. “I made an honest analysis and assessment of this company, having done such assessments for several other companies. Herbalife more than passes the sniff test. There isn’t any sign that I see from top management down to the nutrition clubs that this is a pyramid scheme.”

Stiritz’s track record as a food industry executive may be putting some investors at ease, said Tim Ramey, an analyst at D.A. Davidson & Co. in Lake Oswego, Oregon.

“Mr. Stiritz has a record that is long and full and quite successful,” he said in an interview. “Stiritz is outside the hedge-fund war zone. He’s not involved because of Ackman, he’s involved because he sees a value in the stock.”

Ramey, who criticized Ackman’s pyramid case, recommends buying the shares and said they’ll reach $92 within the next 12 to 18 months.

Pet Food

Stiritz was named CEO of pet food maker Ralston Purina Co. in 1981 after presenting the board with a radical strategic plan to focus the company on consumer products. He spent the next two decades carving off units such as the Jack-in-the-Box hamburger chain and the St. Louis Blues hockey team. He added companies like Energizer batteries.

Stiritz pioneered the use of Nielsen data to measure the effect of promotions on market share and advanced the use of share buybacks and spinoffs to boost shareholder value, according to William Thorndike, founder of Boston-based private equity firm Housatonic Partners, who profiled Stiritz for his 2012 book, “The Outsiders.”

In 2001, Stiritz sold Ralston Purina to Nestle SA (NESN) for a record $10.4 billion, which was 14 times its cash flow. A dollar invested in Stiritz’s tenure as CEO was worth $57 at the end, according to Thorndike.

As head of Ralcorp Holdings Inc. in 2011, Stiritz rebuffed a $94-a-share takeover offer from ConAgra Foods Inc. (CAG:US), deciding instead to spin off Post Holdings Inc. and take control of the new company. The new management of Ralcorp sold the company to ConAgra more than a year later for $90 a share. Stiritz considers the deal his “finest piece of shareholder value creation.”

Board Work

When someone suggested Herbalife as an investment several years ago, Stiritz passed. This time he was swayed to look harder after Icahn took a 16 percent stake. The two have crossed paths in negotiations over the years related to Stiritz’s extensive corporate board work.

Stiritz’s interest in Herbalife dovetails with his career in the food business, where he had a front-row seat on America’s obesity epidemic. He helped develop technology to isolate soy proteins, a key ingredient in Herbalife’s largest product, Formula 1 meal-replacement shakes.

Stiritz said the company’s nutrition clubs -- shopfronts where customers can drop by to sample products and exchange weight-loss tips -- are a simple, cost-effective counter to a culture barraged with easy calories. He said he fantasizes about government officials pushing nutrition clubs into schools.

Addictive Behavior

“We all want to belong to something,” he said. “You’re changing addictive behavior and that has societal benefits.”

Ackman has panned the clubs, where members pay a fee to sample key products, as a tool to recruit more distributors rather than sell product at retail.

Katherine Zeratsky, a registered dietician at the Mayo Clinic in Minnesota, said protein powders can be effective for short-term weight loss. Maintaining weight loss, however, requires new eating habits, including the addition of fresh fruits and vegetables, she said.

“If you’re looking for it to be the magic bullet, it’s not,” Zeratsky said. “If you’re looking for it to be a bullet in your arsenal, it can be good.”

Stiritz, a slender man, drinks Formula 1 shakes as many as three times a day, blending them in his atrium-like kitchen with strawberries or bananas and a splash of orange juice and ice. He has used other protein powders for years.

Stiritz’s faith in the products doesn’t stop with Herbalife. Just last month, his Post Holdings acquired Premier Nutrition, a fitness supplement maker. Herbalife CEO Johnson shouldn’t worry, though. Stiritz said Premier is sold in stores, so the two companies won’t compete directly.

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)
    • $38.42 USD
    • 0.44
    • 1.15%
  • POST
    (Post Holdings Inc)
    • $42.47 USD
    • -0.04
    • -0.09%
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