Herbalife Ltd. (HLF:US)’s feud with hedge-fund manager Bill Ackman has driven the company further into the arms of another billionaire investor: Carl Icahn.
Herbalife announced plans today to nominate three board members picked by Icahn, the company’s biggest shareholder, adding to two directors he already has in place. The move follows a probe into Herbalife by the Federal Trade Commission that had dragged down the shares over the past two weeks.
Icahn’s new agreement escalates hostilities with Ackman, who has vowed to shut down the seller of weight-loss shakes and skin creams, calling the company a pyramid scheme. The three new directors will replace board members who were less prepared to ward off Ackman’s attacks, said Robert Chapman, an Herbalife investor at Chapman Capital LLC in Manhattan Beach, California.
“It’s nothing short of a battle zone,” said Chapman, whose hedge fund owns Herbalife stock and bullish derivatives options “Icahn’s designees are made of a much harder metal and mettle than those being replaced.”
Today’s announcement sent Herbalife’s stock up 6.7 percent to $52.86 at the close in New York. That gain marks the largest increase since Feb. 3, reflecting optimism that Icahn’s muscle will improve the company’s prospects. Before today’s run-up, Herbalife shares had fallen 18 percent since the company disclosed on March 12 that the FTC had started a civil probe into its practices.
“This is a very positive agreement and we appreciate the Icahn parties’ shared confidence in Herbalife’s continued success,” Michael O. Johnson, chairman and chief executive officer, said in today’s statement.
Herbalife will nominate Hunter C. Gary, Jesse A. Lynn and James L. Nelson to the board at its annual general meeting scheduled for April 29, the company said in today’s statement. Icahn and related companies own about 16.8 percent of Herbalife’s stock (HLF:US), and will control a total of five of 13 board (HLF:US) members if the nominees are approved.
The nominees include two executives at Icahn’s investment company. Gary, 39, is a senior vice president at Icahn Enterprises and married to the daughter of the billionaire’s wife. Lynn, 43, works as the firm’s assistant general counsel. Nelson, meanwhile, is an independent director for Icahn Enterprises. The nominees would replace current directors Carole Black, Michael Levitt and Columbe Nicholas, who will leave the board. Icahn and Herbalife didn’t discuss the reason for their departures.
Icahn said on Twitter today that he expected the new directors to “enhance value and contribute to the long-term success” of Herbalife.
The billionaire disclosed early last year that he had taken a stake in the company, saying he would discuss strategic alternatives with management. Icahn is up about $300 million so far on the investment, he said today on CNBC.
“In the long run, I think Herbalife is very undervalued,” Icahn said. “It is not a Ponzi scheme. I have done a lot of research on it, and that’s what I believe without question.”
As part of today’s accord, Icahn agreed to continue to meet certain “standstill provisions,” meaning he won’t try to accumulate enough stock to take over the company. He also will vote in support of all board nominees, including those that he didn’t pick. Icahn and affiliates continue to have the right to increase their stake to 25 percent.
Icahn is the highest-profile investor opposing the campaign of Ackman, who made a $1 billion bet against Herbalife’s stock in 2012 and set out to prove that the company is a pyramid scheme. Ackman claims that the business misleads distributors, misrepresents sales figures and sells a commodity product at inflated prices. Herbalife, which sells products in more than 90 countries through a network of independent distributors, has repeatedly denied Ackman’s allegations.
Until the FTC announcement drove down the shares, Ackman’s wager against the company had been seen as the worst investment ever made by his firm, Pershing Square Capital Management LP. As of last weekend, Ackman was close to breaking even on the bet. Pershing investors stand to make about $2 billion if Herbalife disappears altogether, Ackman said earlier this month.
The FTC, along with the U.S. Securities and Exchange Commission, was asked by Senator Edward Markey, a Massachusetts Democrat, to look into Herbalife’s business practices. An advocacy group called the League of United Latin American Citizens also has met with FTC Chairwoman Edith Ramirez to describe alleged abuses by the company. Ramirez told Markey in a letter that his concerns were being “carefully considered.”
The New York Times reported this month that Ackman had donated $10,000 to the advocacy group and hired a former aide to Markey as part of his anti-Herbalife campaign.
Still, Ackman didn’t score a big victory when the FTC agreed to investigate Herbalife, Icahn said today on CNBC. He also said he has no personal animosity toward Ackman and credits him with turning him onto a profitable investment.
“I wouldn’t have been up if it weren’t for Ackman because I wouldn’t have looked at Herbalife,” Icahn said.
As an activist investor, Icahn is a frequent antagonist to management at companies such as Apple Inc., Netflix Inc. and Dell Inc. Earlier this year, Icahn called for EBay Inc. to spin off its PayPal division -- a proposal executives have rejected.
That history suggests that Icahn can be a dangerous ally, said Erik Gordon, a business professor at the University of Michigan.
“Inviting Icahn into your board room to keep Ackman out is like inviting Hell’s Angels into house to guard you against angry librarians,” he said.
Icahn may eventually want to push out Herbalife’s management to help boost the company’s value, Gordon said.
“With five directors, he needs to convince only two of the remaining eight to join him in changing management or anything else,” Gordon said. “He got closer without having to buy additional shares or engage in an expensive proxy battle.”
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