Thursday, November 14, 2013

Honey Bunches of LBOats: Why Bill Stiritz is a Dirty Old Man

"The situation is pregnant for a recap or leveraged buyout of Herbalife, and I would be willing to participate."
Pregnant? Say what? With that one sentence the formerly wholesome looking grandfather convinced me that he is a dirty old man lusting after the cocoa bronzed flesh of the hottest Latina he'd ever seen. The moment he laid eyes on her was a thunderbolt. Beautiful skin, toned abs, athletic build, with a big juicy booty. She also had that amazing mixed look that is so hard to pin down. He was pretty sure that she was mostly Latina, but she also had some Asian, Black, and white thrown in the mix. She was the ice cream truck in the flesh.

He wasn't exactly sure how to approach her though. He was this soft spoken crusty old Midwesterner that looked more like Captain Stubing than Enrique Iglesias. Stiritz is rich, which works on a lot of girls, but this girl was different and it was obvious she had tons of her own money.  He heard she'd been dating guys on the street for years, plus he knew she already kind of moved in with this old Jewish guy while she was trapped in an abusive relationship with this crazy young Jewish stalker that kept harassing her, publicly humiliating her and going so far as to call the cops on her and her friends. The icing on the cake; she had recently broken up with Dan Loeb. Dan Loeb!?!? How the hell is he supposed to compete with looks like that? He'd seen her type before though and instantly recognized that to someone trapped in an abusive relationship that nothing was more important than security and security was one thing he could offer. The competition to woo her would be stiff, but ever the hopeless romantic, Bill Stiritz set in motion his plan to win over the nubile young hottie, by making her safe. 

For Stiritz, it wasn't just about a hook up either. She stirred something deep inside of him and he felt a deep connection lurking under his attraction for her. In his soul he knew they were previously connected in some way and that such a connection would help draw the two together. He just had to get her to notice him. 

He didn't want to screw this up either, so instead of approaching her directly, he started talking to her friends and asking them what she liked. He called around to her buddies in L.A. and New York. Over and over they all told him the same thing: the most important thing to her was the business she'd worked so hard to build. If you want to understand her, understand her business. In fact, she was consumed by her business and she often felt alienated from her peers because although deep in her core she knew who she was and how she was capable of changing the lives of so many people, very few people understood her. 

After some research and weeks of secretly buying her products and quietly investing in her company, Stiritz built up his cojones and decided to call her. Much to his surprise, the two hit it off and he eventually asked her to dinner. Just like he suspected she shared his feeling of deep connection and after dinner they went back to her place and stayed up all night talking while sharing a mango dulce-de-leche smoothie out of two straws like high school kids.  She'd even shared with him that even though she had never felt stronger and more sure of herself than she did now, her father's death damaged her so deeply she felt lucky to be here and that she almost didn't make it. Her shrink told her that the acute absence she felt as a result of her father's death is precisely why she dated older men, and that was probably why the wisdom, maturity and experience of Stiritz was compelling much of her attraction. Stiritz disclosed that he was already married, but that his relationship with his wife, had become rote and lost much of its spark. To be sure, the two were still in love, but they had always agreed that occasionally dating others was OK provided that it didn't jeopardize their marriage or their future plans. The two had had a long complicated relationship with each other;  he had been friends and business partners with his wife's ex husband and he had actually started dating her during the divorce while they were selling the business.

The date had gone so well in fact, that Stiritz in a moment of giddy pleasure accidentally disclosed that he had built up a 5% stake in her company. "Jimminy Cricket! I shouldn't have said that! I wanted it to be a surprise." Much to his relief, his slip up was warmly received and her embrace signaled the official start of their relationship. Tossing the blender full of smoothie into the fireplace, she beckoned toward the bedroom as Stiritz thought to himself, "Is this really happening? Is this going to happen? If this is a dream I had better act fast before I wake up and spoil it." He jumped up, ripping off his gold button navy blazer, and kicked his Topsiders to the foot of the bed as he watched her undress...

The next morning over bowls of Raisin Bran and Honey Bunches of Oats, the two lovers, still fuzzy and warm from their night together began to talk about the future. They were going to have to tell all their friends within the next ten days, so why wait? They were proud of each other and they both knew this was going to be a long lasting relationship, so they decided to tell everyone. Their first call was to the SEC, and their second call was to Bill's wife. Everything was hunky dory.

It's been a few months since their first date and things have gotten pretty serious. It goes far beyond Stiritz just trying to get some Herbalife-recap poon, he wants to be the baby's daddy and is going to do what he can to impregnate her. And after months of uncertainty, and previously failed attempts at conception (her OBGyn turned out to be a crook) she's ready to commit. She's given it a lot of thought and although she loves being single, now is a great time to make a baby.

And so began the story of our two star crossed lovers, Herbalife and William Stiritz. 

Stiritz's most recent comments to Bloomberg's Duane Stanford about an LBO combined with Herbalife's recent strength (rising in the face of Bill Ackman's impending Robin Hood diatribe), pricked up the hairs on my neck and got me thinking. Why now? If my girl's stalker started calling around to everyone we know and told them he was supposedly going do everything he could to embarrass her, publicly discredit her, humiliate her, and then kill her, what would my reaction be? Well, the first thing I'd do is warn him off. I know that a warning will do nothing to dissuade this guy; he's a delusional, self-righteous prick that parades himself around as a hero, so he'll never back down. The kind of guy that yelled at you through a loud horn how he was going to kick your ass and stomp your head into the ground as he slowly backs away from you and calls his weightlifting friends on his cellphone. In fact you are pretty sure your warning will only entice him further. It would be great if your warning manages to get him to back down because although you are a competent brawler, you really don't want to fight and prefer peace over war; the worst peace is better than the best war. If your warning doesn't get him to back down that's OK too because it will help draw him out. You don't want to fight, but have accepted the inevitable as you have been expecting a dust up for a while. If it's an inevitability, you may as well make sure you can knock him the fuck out and completely emasculate him in front of all his friends when he's got no where to run too. The entertaining aspect of personalities like Ackman's is that they can be so sure of themselves you can clearly and cogently delineate for them point by point how you are going to destroy them, but that only further convinces them that they are invincible and that their demise will never unfold as you've described for them.

And how would Stiritz KO Ackman? It's pretty simple and he already told Duane Stanford: LBO or recap. If you really want to do some damage you have to make sure he cannot run away because he is smaller and more agile than you are, so first you have to box him in. In one week Ackman is going to take the stage and deride Herbalife yet again. Average trading volume is shy of 3M, but current short interest would require at least 7 trading days to cover. Ackman can't cover his short before Robin Hood, so he's locked in. No where to run. Ackman, if he hasn't already realized, got caught trying to steal second and is now caught in a run down. The players cycling through the toss and tag are none other than Stiritz, Icahn, Soros, Michael Johnson, and Dennis Nally. Dennis Nally is perhaps the least appreciated player in the lineup but will time his throw just right to allow Johnson to tag out Ackman as he desperately scampers towards the safety of the bag.

Stiritz may not be much of a street fighter or a ballplayer, but he is a consummate deal maker. Much of his past deals were born out of relationships he had with other Board Members, so I started looking at his current board over at Post Holdings. You don't have to dig very deeply to find a plausible suitor for an Herbalife deal. Out of the 48 Board relationships that Stiritz has, two really jumped out at me for their potential: Gregory Curl (Temasek) and David Skarie (RH Financial). Skarie another dealmaker, was Co-CEO and President at Ralcorp while Curl was an investment banker and is President of Temasek Holdings, an investment company. The others seemed less plausible as they're spread across pet food, batteries, and similar such companies. You may be able to make an argument why a beverage company or a food company would want to buy Herbalife, but Stiritz did not say "takeover", he said LBO or recap. Skarie seems less likely than Curl, only because RH Financial Corp(which he is also a board member of) is a subsidiary of Waste Connections Inc, a recycling company. Recycling doesn't seem like it'd be much help to Herbalife unless Skarie plans to turn Ackman's PowerPoint handouts into tomorrow's newspaper. So Greg Curl stands alone. 

Here is where things get really interesting, Temasek is an investment company based in Singapore that is focused on two regions: Asia and Latin America. By their own admission this $225 Billion company's investment themes center on: 
"Transforming Economies; Growing Middle Income Populations; Deepening Comparative Advantages; and Emerging Champions."
Can you think of any company that primarily operates in the transforming economies of Asia and Latin America, in middle income populations with deep comparative advantages that is an emerging champion(i.e., #1 selling product in category)? I am pretty sure Bill Stiritz owns at least 5% of one.

If Temasek in fact wanted to initiate an Herbalife LBO, it wouldn't be too hard for them to raise the debt. Temasek has been assigned an overall corporate credit rating of Aaa by Moody’s and AAA by Standard & Poor’s for 10 consecutive years. Even if Herbalife wanted to self-finance a partial tender like I believe they could, there is very little doubt that Temasek has the rating and the wherewithal to successfully run an Herbalife buyout. 

And that brings us back to Ackman, now frantically running between 1st and 2nd base. As our hero Billy stutter steps and jukes his way back and forth between the bases, Stiritz, Johnson and Nally are patiently biding their time and calmly toss the ball back and forth to eachother as they creep closer and closer to Billy's pinstripes (he is no longer wanted at the Mets). And a couple days before he takes the stage at Robin Hood, Herbalife is handed their audited financials, courtesy of Dennis Nally and Johnson tags out Billy as he defiantly yells as the umpire that he was safe, even though he was 25 feet from the bag. Ackman is retired and Pershing takes the field. With Billy himself on the mound, and one man on, Temasek Holdings comes up to bat and knocks the skin off the first pitch by offering at least $65-$75 share for Herbalife. Game over, Herbalife wins and the season is finished for Wild Thing Bill. Poor Billy is never going to get the chance to hit that 9th inning, record breaking homer he's been telling everyone about since October. Worse yet, he lost the biggest game of his last season before becoming a free agent. 

Instead of standing at the plate and pointing to the fences like Ackman, Stiritz, Johnson and possibly Temasek are focused on keeping their eye on the ball and connecting for a solid base hit. I suspect a deal is in the works, otherwise Herbalife would have included share repurchases in 2014 guidance. How do you buyback what is no longer public? Sure $65-75 undervalues Herbalife (which is easily worth $90-$105), but it'd be first step in the right direction. An LBO or recap, enabled by PwC's impending re-audit, and shepherded by Temasek would undoubtedly be a solid double, and a game winning hit for everyone(except the shorts). In this game, Ackman has been the berating loudmouth jock constantly talking about how good he is and how he never strikes out, while the Herbalife team is following Billy Beane's playbook. I wouldn't be surprised if next week sees Ackman facing some stiff negotiations to stay in the majors, provided he doesn't get sent back to the minors.

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