Herbalife (HLF) may have found a way to boost the share price and create some pain for those short the shares. However, it might have hampered the return for holders of its 2.00% convertible bond due in 2019.
On August 21, 2017, Herbalife announced a modified “Dutch auction” to purchase $600 million worth of its shares at prices not less than $60.00 nor greater than $68.00. The tender offer expires on September 19, 2017, unless revised. The shares rallied above $68.00 on the news. See chart.
On August 28, 2017, the tender offer was amended so that if the closing share price is below $57.00 or greater than $71.40, then the company may terminate the tender offer without purchasing any shares.
The shares have rarely been above $71.40 for long; see chart.
The modified Dutch tender announcement by the board suggested that it felt the shares were undervalued, and wanted to provide all shareholders the opportunity to sell shares back to the firm at a known price. This is unlike the typical share repurchase program where shareholders have no clue if their shares are being purchased by the firm.
Investors that tender shares in the Dutch tender that are accepted will receive a Contingent Value Right that will provide a payment should the firm go private within two years.
The tender offer is expected to be funded from the proceeds of the $1.3 billion term loan under its credit facility.
The short interest as of August 15, 2017 stood at 22.4 million shares or 23.85% of the outstanding shares.
It would appear that an investor who tenders their shares could enjoy the cash and have a CVR. Therefore, the potential upside could be enjoyed without the potential downside risks. The risk is that the shares close above $71.40 or below $57.00 and Herbalife terminates the Dutch tender offer. It is somewhat puzzling why a decline in the share price would have Herbalife terminating the Dutch tender, given the desire to repurchase shares at a management/board set price range.
It might make sense to tender the shares at $68.00 should the stock price be trading above that level as the tender deadline approaches, given the issuance of the CVR. The risk would be that the shares trade higher over the next two years without a go private transaction. That would be the opportunity cost.
Herbalife has a 2.00% convertible bond with a 2019 maturity date with an $86.28 conversion stock price. The Dutch tender price $60.00 to $68.00 makes the bond look expensive unless a go private transaction takes place above $86.28, or the shares trade higher without a go private transaction. A price of $86.28 would be a premium of 24.66% compared to today's closing price of $69.21. The June 15, 2016, call to exit the bond at $98.62 in hindsight looks like it was a good call.
As of June 30, 2017, long-term debt stood at $2.188 billion compared to shareholder equity of $200 million. Therefore, any go private transaction might require a fair amount of equity. Net interest expense totaled $68.1 million for the six months endings June 30, 2017, or $0.79 per 86.0 million diluted shares. It is tough to get a stock valuation that would make 2.00% convertible bonds attractive.
The stock and the bonds look priced for perfection. And the terms of the Dutch tender offer provide owners a way to exit and maintain upset potential. That does not happen often.
It might be time to hit the exit or watch from the sidelines.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.