Herbalife Initiates Tender Offer, Indicates Going Private

Herbalife Ltd. (NYSE:HLF) recently announced that it has commenced a self tender offer by way of a “modified Dutch auction” to buy back $600 million worth common stock, in cash at a price of not less than $60 or exceeding $68.

Herbalife also stated that against each of its tendered shares, shareholders would be provided with a non-transferable contractual contingent value right (CVR). This will allow shareholders to receive a contingent payment in cash, in case Herbalife becomes acquired through a private transaction in the forthcoming two years.

The offer will expire on Sep 19, unless extended. Post the announcement on Aug 21, shares of this Zacks Rank #2 (Buy) company increased 9.8% in the after market trading hours.

By way of providing a tender offer that includes both cash payment as well as a CVR, the company offers not only adequate liquidity to its shareholders but also value. As a result, shareholders can receive a higher price in addition to the self tender, under the possible scenario of the company becoming privately acquired.

Notably, on Aug 16, the company held talks with an undisclosed prospective financial investor which indicated that there might be a possibility of Herbalife becoming privately acquired, per media sources. These talks ended with no formal decisions. Nevertheless, the company’s board of directors decided to offer its shareholders with adequate protection in case of a private acquisition. Such a move clearly indicates the company’s commitment toward enhancing shareholder value.

During 2017, the company already acquired $299 million of its shares, as per its $1.5 billion share buy back plan. The tender offer is therefore a lucrative process for the company to purchase additional shares. In relation to this offer, Carl Icahn, the company’s largest shareholder, entered into an agreement with Herbalife stating that he would keep his ownership within 50% and not exceed the same, unless he intends to acquire 100% of the company’s outstanding shares. As of now, Icahn and his affiliates (Icahn Entities) hold a 24% stake in the company.

However, talks of Herbalife going private could have been a significant blow for billionaire investor Bill Ackman, who has made a $1 billion bet against the nutrition company, accusing it of being a pyramid scheme since December 2012. Ackman believed that the nutrition clubs run by Herbalife's distributors focus on recruitment instead of selling products. Also, it received a civil investigative demand in 2014 from the FTC related to its marketing practices. However, Herbalife resolved the probe with the FTC and paid $200 million in fines and settlements without being named a pyramid scheme.

Besides these allegations, we note that Herbalife’s sales volumes have declined in the recent times owing to new stringent FTC regulations in the United States, softness in its Mexico operations and price hike in China. Sales were also hurt as distributors are adhering to the latest protocols.

Nevertheless, the company remains confident regarding its performance which is reflected in its earnings history. Impressively, the company’s earnings have outpaced the Zacks Consensus estimate for 11 straight quarters now, with an average beat of 25.1% in the trailing four quarters. The company has also been progressing well with its cost saving measures and technology innovations. We observed that over the past six months, shares of Herbalife have increased 14.5%, outperforming the industry’s decline of 8.4%.

With these aspects in mind, we need to wait and see whether shareholders exhibit confidence in the stock and refrain from entering into the tender offer.

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