On 21 August, after horrendous 2Q 2017 results, Herbalife (HLF) announced a self-tender offer seeking to purchase up to $600m of its ordinary shares. With much aplomb they claimed, "Our Board and management team are committed to enhancing shareholder value and we believe today's action is just one more step in meeting this goal."
In normal convention, a share buyback of about 10% of the issued shared capital should be interpreted as a major vote of confidence by the management of a company. Indeed, at the opening bell HLF shares rose by 9% to $67.80, the upper limit of the tender offer of $68. After all, investors may participate in the tender ($62-68) and receive a contractual contingent value right ("CVR") allowing participants in the tender offer to receive a contingent cash payment should Herbalife be acquired in a going-private transaction within two years of today's commencement of the tender offer.
This should be great news. $68 per share today, and the upside if there is a buyout in the next two years!
However a deeper investigation reveals a starkly muddier picture. One has to travel back to August '16, when there were substantiated whispers that the largest shareholder, Carl Icahn, was rumored to be selling his +20% stake. Alas there were no buyers higher than $54 a share. Fast forward to the present, HLF's outlook has since taken a decisive turn for the worse, with a severely restrictive FTC injunction in the US as well as a clampdown on MLM's in China, the company's two largest markets.
My interpretation of this tender is it represents a desperate attempt by Herbalife to conceal a number of life-threatening events. This might be the last opportunity for investors to leave with a price tag above $60:
-The increasing and more stringent scrutiny in the public eye is causing serious disruption to HLF's recruitment business. Management would far prefer NOT to be listed and avoid additional eyes from the likes of the SEC;
-The tender offer reports talks of a private buyout that failed. There is virtually no plausible (but unconfirmed) explanation that the talks were with Icahn; he discussed buying the entire business but walked away. Why, we don't know, but given the deteriorating outlook, I can only imagine on price. See my previous article on the value of HLF with a lifespan of less than a decade with declining profits. But in summary, here is my simple valuation.
What value does one attribute to a company whose largest business geography is under serious duress, whose primary growth driver -China - has stalled, a company that may well face further monetary fines and censures if any of the FTC regulations are contravened in the next 7 years, a company whose international plans hinge firmly on a US operation that is under siege…
In my opinion, assuming a lifespan beyond 10 years would be reckless. I assume earnings growth will decline by 10% annually as the new regulations severely constrain new recruits. So taking the 2017 net profit as a given ($4.5 per share or $366m for HLF) and forecasting a 10% decline for the following decade, I discount the Present Value of the earnings stream at a 5% discount rate. Take off the net debt on the Balance Sheet currently ($644m), and I derive a value (assuming 86m diluted shares) of $16.6 per HLF share. Note this model although simplistic is transparent - you can input your own decline; the absence of a terminal value is a key assumption, that Herbalife dies in a decade.
-Icahn has committed not to increase his stake to above 50% (currently 25%) unless he takes the entire company private. But of course he has - why would he want to put more than his current $1bn investment into a sinking ship! Even the iconic Icahn is not willing to prioritize ego over losing another $4bn to outwit his arch nemesis Bill Ackman.
-This tender offer covers about 10% of the issued share capital. Factoring in the 25% that is not permitted to participate in the offer; that leaves 75% of the outstanding shares that will be scrambling to be included into the maximum tender of 10%. In other words, only 1 out of 7 shares held by public will be able to capitalize on this offer.
-The question begs asking: What will you do with your remaining shares? Carl Icahn is no longer a buyer - he had his opportunity to take HLF private but declined. Who else is going to buy this sinking ship that is taking water from two gaping holes, the US and China. In August 16, the highest bid was $54… and the situation is markedly worse today.
Don't be fooled by this thinly veiled ruse. Sell fast in the next two months into the tender offer. And then watch out below. The room for misleading income claims and circumventing the law over nearly four decades has finally come to a close. Lies, damn lies and Herbalife.
Disclosure: I am/we are short HLF.
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.