Monday, January 27, 2014

The Chinks in Ackman's Armor

Last week's Herbalife dog pile seemed to be an oddly coordinated event. I think it's remarkable that someone would spend millions of dollars on a massive put strategy just days before a letter from Senator Markey hit the wire, followed by another dog pile(this one hot and steaming) by Michelle Celarier and her fallacious NY post article. Maybe fellatious would be a better term for her article as she is obviously trying to polish someone's financial knob with it. Don't think I'm being sexist here with my phallic reference it is just that her writing clearly demonstrates that she'll never be a cunning-linguist.

Anyhow much has been made about the Markey letter although he didn't say anything that Pershing hasn't said before. Maybe the irony was lost on Senator Markey and his staff, but I thought it was a bit premature to publicly accuse a publicly traded company of destroying a family's "entire 401(k)" without considering the ramifications on other families' 401(k)s. Understandably, as a representative of his constituents he wants to protect and serve them and I can't fault him for that. What I think is odd about Senator Markey's letters though is that his letters to Chairwomen White and Ramirez were finished within a few minutes of each other and sent off on Tuesday morning; a full 30 hours before he deigned to pen his letter to Michael Johnson and send it over to Herbalife on Wednesday evening. If he just wanted answers to the questions he posed to Mr. Johnson on pages four, five and six of his letter, why not just send Herbalife a letter privately before sending one to the SEC and the FTC? Senator Markey's letter ostensibly destroyed $1.3B sprinkled in 401(k)s throughout the US and I can't help but think that his constituents would have been better served had he kept his request for information from Herbalife between himself and Herbalife.

Markey has openly stated that his staff met with Pershing, but he may have unwittingly turned a trick for Pershing while trying to protect his constituents.  I think the information that Pershing fed him at their meeting with his staff was only part of the story they wanted him to hear. The part they probably failed to tell him was that they may have been using him in a coordinated activist attack on Herbalife without his knowledge.

Pershing's brand of "Ack-tivism" is unlike others. When I think of a real activist investor it conjures up images of an insightful individual that somehow manages to recapture some of the value that leaks out of companies in various forms. Inefficiency, poor management, cap structure etc. Last week really crystallized something for me that I didn't fully appreciate before; Ackman's brand of activism is not about adding value, its about strategic manipulation and I think he does the same with his investors. I don't think it's a coincidence the recent attacks against Herbalife come at a time they are in their blackout period and cannot financially defend themselves. When Pershing gets called out and someone tries to hold them accountable they dodge the question, hide behind semantics and obfuscate the issue as much as possible.

You'll remember it set off all sorts of alarms in Pershing when I said that Shane Dinneen had left Pershing and that Pershing was acutely sensitive to this claim. Needless to say, I still haven't heard back from my last email to Rubenstein, but they'll no doubt have a fluster of activity in the coming days when they have to answer the shit storm of reporters questions and investors questions once they finally confirm that Shane is in fact gone from Pershing and that Pershing has been denying this for at least a month. For all the energy they expended attempting to deny that Shane had disappeared from Pershing, it is my understanding that Friday January 24th was his last day.

Michelle Celarier, who so valiantly defended Shane on Twitter could never muster the intestinal fortitude to confirm or deny that Shane was on "hiatus" as I claimed. She towed the party line and would only go so far as to say that he was not "fired". She even reiterated that Shane was a partner at Pershing.

You don't have read many of her articles at the NY Post to quickly see that her journalistic integrity is questionable with respect to her Herbalife reporting. Horatio Gutierrez proved to us just how biased she is.

A perfect example is last week's ridiculous article that Herbalife was being targeted by the Chinese media as a pyramid scheme. Effectively Celarier attempted to infer that Chinese regulators and the media are going after Herbalife. Her support of this view is ONE SINGLE ARTICLE that is five months old and was overwhelmingly ignored in China(even by her own report). She fails to mention in her article that Herbalife shaped their operations in China to explicitly fit the Chinese regulations, and she also fails to inform her reader that the news regarding Herbalife in China is overwhelmingly positive.

In a well written VIC article about Herbalife (hat tip to Katana), there is some noteworthy commentary by rh121 in which he/she states:

I think the NY Post article which probably triggered the late Friday sell off is interesting. The title "Chinese media target Herbalife as pyramid scheme" implies ongoing Chinese media attention on Herbalife and possible investigation by government agencies.
I went on, the google in China, to search Herbalife related news published by Chinese media in last couple of weeks. The only news I can find is either related to NU Skin event or Markey letter. There is no news article targeting Herbalife directly at all. The NY Post article is based on something published by Chinese news media First Financial Daily last August, which according to NY Post, "received little attention when first published". Here is the original First Financial Daily article and a translation:
I then checked website of First Financial Daily, there is no new article targeting Herbalife. The First Financial Daily is simply reporting what everyone else is reporting: Markey letter and NU Skin.
So there is no evidence Chinese media is targeting Herbalife. I wonder why NY Post wrote the article in that particular way.
I also talked to someone who is close to Chinese media cycle about those two articles published by People's Daily targeting NU Skin. I don't know how accurate or reliable his information is so take it with a grain of salt.
He actually talked to the author of one of the articles. The reporter told him some government official assigned the topic (the reporter was not very clear about what the assigned topic was) and they simply picked NU Skin. The reporter also said the order did not come from the top, but somewhere in the middle. (Keep in mind People's Daily is the Party's mouth piece)
My contact did not believe what the reporter told him so he asked around, it turns out those two articles were originated from People Daily's regional office, not the central office. He heard NU Skin might have pissed someone off at the regional level but actually has a pretty good relationship with the central office or at least the sales department at the central office. As a matter of fact, NU Skin has been a client buying ad spaces from People's Daily. He said the central office is very angry at the regional office and nothing similar will happen again.
The Chinese New Year is coming up. The official holiday lasts seven days (01/31 - 02/06), but in traditional sense the holiday lasts fifteen days, all the way to 02/15, so nothing major gets done between 02/07 and 02/15 either. Herbalife will announce Q4 on 02/18. Not sure when Ackman will publish his Herbalife/China material. Feb is setting up to be very interesting for all parties involved.
I can't speak to the veracity of rh121's claims about the way the news cycle unfold in China, but I decided to try and synthesize rh121's experience and would urge everyone else to do the same. I just went to Baidu and started searching. At the top of the Baudi Herbalife news feed is actually a story about Herbalife's strategic partnership with Shenzhen Satellite to sponsor "'s Show" and their cooperation in the development of two other shows, "Freaky College and "spicy Mom College" (I'll be sure to DVR spicy Mom College). That is followed by a story about Cristiano Ronaldo's Ballon d'Or and another about Herbalife's donations endowing cochlear implants to needy children in China. Deeper in that feed is the report of Markey's letters that he sent last week. Counter to what Celarier would have everyone believe, it doesn't appear that Herbalife is being targeted in any way, except by her and Ackman. The Chinese media apparatus seems to be focused almost solely on all the great things Herbalife is doing in China and not the absurd claims that they're functioning illegally in that country.

One of the funnier anecdotes I'll share with you about my Baidu experience is that when I searched Michelle Celarier's name it poetically pulled up "Case Study in Corruption" by Celarier, Michelle. You can only imagine the completely over the top eyeroll and coffee-spitting guffaw I gave when I saw that. Suffice it to say that I don't place much weight in the opinion of Michelle Celarier when it comes to Herbalife or corruption. I'm not sure you could expect much from someone that considers links to EDGAR data to somehow constitute misinformation.

So just for a recap (ha, get it?) Dinneen disappears for months and then suddenly reappears around the time there is increased PUT activity in Herbalife, while Herbalife is in a blackout period and can't support their shares with open market activity, which happens days before Markey publicly releases a series of letters against Herbalife(that went to Herbalife last) that is then capped off by Celarier's biased story about Herbalife China, and this all happens as Shane is packing up his belongings on his final day at Pershing Square, cumulatively contributing to the destruction of over $1B of value in investment accounts all across the country, just a couple of days before short interest is publicly reported.

I can't imagine it would look good if Ackman recently covered and/or restructured more Herbalife last week or that he used the weakness following Markey's letter to unwind a big chunk of his short. Pershing can say all they want to say about not capitulating in their Herbalife short, but the facts are that Pershing restructured a huge chunk of their short and the two lead Herbalife analysts are gone. Tonight's short interest update will only capture any reduction that took place as of January 15th, leaving eight recent trading days unaccounted for, but it will be interesting to note if Ackman still has as much skin in the game as he did on December 31st.

Nonetheless I think the situation may force Herbalife to respond in a way that Ackman may not enjoy and may have Loeb updating his Bloomberg tag again soon. I would not be surprised if Herbalife politely declines Senator Markey's invitation to Patomac Two-step and goes all Humpty Dance by pre-announcing earnings this week so they can get out of their blackout period and get back in the market buying shares. DeSimone has said time and again that share repo was a matter of economic feasibility. If the company was working a debt deal to repurchase $1.5-$2B worth of stock at $80/share, didn't that repo just become at least $1.5B more economically feasible? Even if Herbalife doesn't pre-announce and waits to report earnings as planned, that is still well ahead of Senator Markey's requested response date.

The only thing that seems to have any chance of derailing an Herbalife self-tender for 10-15% of their shares before their scheduled earnings release is Tim Ramey's recent departure from DA Davidson to go work for Bill Stiritz. Although neither Stiritz nor Ramey have indicated that there was any connection between Ramey's hiring and a possible deal for Herbalife, if you were going to launch a LBO that directly competes with Herbalife's planned partial tender, wouldn't you want the best Herbalife analyst on the street as part of your team? I would. And any potential bidder for Herbalife faces the same looming principal facing DeSimone: economic feasibility. For all the aggravation he's caused them, Icahn, Stiritz and DeSimone may all be sending Ackman and Celarier thank you cards for providing them with one hell of an economically feasible discount on a stock that is easily worth $120/share.

P.S. As a post-script, I did email Rubenstein today asking about Dinneen and Adamski, but I haven't heard back. Judging by the response Gasparino reported, I think it's safe to say that at the very minimum Pershing Square owes their investors an explanation. If Pershing was so willing to so vocally mislead the press they may also be misleading regulators, the market and their clients.


  1. Super good writing skills and overview, etc

    Had an question, your source reports - "He said the central office is very angry at the regional office and nothing similar will happen again." Now, if the information written about NUS was accidental - why did regulators decide to take action?
    As you Citron Research wrote about NUS operating illegally in China back in Oct, 2013 Citron also found HLF to be operating legally.

    Looks to me that you think both HLF and NUS are in no danger with regulators in China. That pleases me, but is that your take as well?

  2. My hunch is that Pershing Square had to pay off Shane a hefty sum to keep him quiet and the separation negotiation took a while. Certainly if Shane was a smart one he'd understand the leverage he had.