Herbalife Ltd. (HLF:US), the nutrition company hedge fund manager Bill Ackman has accused of being a pyramid scheme, boosted its share buyback by 50 percent to $1.5 billion and announced a $1 billion sale of convertible bonds.
Fourth-quarter earnings (HLF:US) were probably $1.26 to $1.30 a share based on preliminary results, excluding some items, the company also said today. Analysts predicted $1.16, the average of estimates compiled by Bloomberg. Sales rose about 20 percent.
Herbalife is rewarding shareholders after new auditor PricewaterhouseCoopers LP’s examination of its books gave the company a clean bill of health, clearing the way for additional borrowings to fund stock repurchasing. The buyback comes on the same day that Ackman’s Pershing Square Management LP repeated allegations about unethical practices among Herbalife’s distributors.
“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, a New York-based analyst for Wedbush Securities, said in a phone interview. “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 shares climbed (HLF:US) 7.2 percent to $69.02 at the close in New York. Herbalife more than doubled last year.
For the current quarter, the company predicted a range of $1.24 to $1.28 for earnings per share. Dionisio today lowered his estimate to $1.31 from $1.42. Fourth-quarter results will be released Feb. 18.
Herbalife, which makes vitamins, skin creams and meal-replacement shakes and operates in more than 80 countries, has denied Ackman’s claim. Ackman’s New York-based Pershing Square initially sold short at least 20 million Herbalife shares and had lost money on the bet as the stock (HLF:US) more than doubled in 2013 and investors, including billionaire Carl Icahn, backed the Cayman Islands-based company.
Barb Henderson, an Herbalife spokeswoman, declined to comment, in an e-mailed statement today.
The initial buyers of Herbalife’s notes, due in 2019, will be Bank of America Corp., Credit Suisse Group AG, HSBC Holdings Plc and Morgan Stanley, the nutrition company said today in a statement. The former buyback program of $1 billion had an available balance of $653 million.
The offering of $1 billion in notes announced today can be converted to shares if the stock rises at least 25 percent. The securities may be sold tomorrow with a conversion premium of 25 to 30 percent, according to two people with knowledge of the offering. The debt may pay a coupon of about 1.5 percent to 2 percent, said the people, who asked not to be identified, citing a lack of authorization to speak publicly.
The League of United Latin American Citizens will meet with Federal Trade Commission Chairwoman Edith Ramirez on Wednesday “to ask them to intervene and help us defend our community against pyramid schemes in general and Herbalife in particular,” LULAC National Executive Director Brent Wilkes said in a phone interview.
“What we’re hoping is to lay out the case for why intervention is important, and we hope the FTC opens up an investigation, and we hope that eventually they bring action to make sure that either the company corrects its practices or is put out of business,” he said.
Peter Kaplan, an FTC spokesman, confirmed that Ramirez would meet with the group, and declined further comment about Herbalife.
U.S. Senator Edward Markey, a Massachusetts Democrat, sent letters last month to the U.S. Securities and Exchange Commission and the FTC urging the agencies to look into Herbalife’s business practices. The announcement was a boon for Ackman, who since December 2012 has been urging regulators, elected officials and community activists to investigate the company, saying it misrepresents sales figures, misleads distributors about potential earnings and sells a commodity product at inflated prices.
Last week, one of Herbalife’s biggest defenders, Tim Ramey, left his job as an analyst for D.A. Davidson & Co. in Lake Oswego, Oregon, to join Post Holdings Inc. as director of strategic ventures on a consulting basis, Post Chairman and Chief Executive Officer William Stiritz said. Stiritz is Herbalife’s third-largest investor, with 7.4 percent of the shares as of Jan. 29, according to data compiled by Bloomberg.
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