Thursday, February 13, 2014

Safe Harbor in a Storm

Three things surprised me about Bill Ackman's presentation at the Harbor Investment Conference yesterday.

  1. There was not a single powerpoint slide (all question/answer)
  2. He was extremely reticent to discuss Fannie and Freddie (odd for someone that LOVES to talk)
  3. He sort of pretended he didn't know Michelle Celarier.

Earlier in the Q/A William Alden asked if he'd broken even on his Herbalife short. Aside from being pissed that CNBC is not reporting that he is making money on Herbalife's decline, he said that he has not broken even on Herbalife, but refused to disclose his break even price. He also noted that his position now is much larger notionally than it was at the beginning, indicating that he's holding more than 9.8M shares worth of puts.

At first his remark that CNBC was not reporting that he was making money on Herbalife seems a bit counter intuitive simply because we all know that he's lost tons of money on his short. But within the context of what his business actually does (earn 2/20 on the marks) he is making money this year although his investors are still losing money on the trade. Effectively, that's what happened at the end of 2012 too. He marked the books at the Dec 31st price and collected his 2 & 20.

Anyhow, later on during the question/answer session he gave, in which he referred to some people in the audience by name, it really stunned me that given his prior history with Celarier, he appeared to distance himself from her when he acknowledged her question. Why wouldn't he want to acknowledge he's tied his ship up in her port before? Maybe her Harbor is not so safe.

After being acknowledged with a simple "yes" by her fearless leader she asked something along the lines of:
I just wanted for you to comment on the convertible financing and why it doesn't have the effect investors were looking for. There was a lot of talk for a long time that they were going to raise all this money and they were going to squeeze you, and the stock was going to go sky high but now the stock is down. Can you just comment on the structure and what's happened?
After seeing how coolly he responded to her longing yesterday, it got me a little emotional and kind of made me feel bad for Michelle. So giving credit to my own magnanimousness and benevolence(which I have on borrow from Ackman at a pretty good rate) I decided to help out Michelle so she could rest her wrenching heart. And how will I do that?

Why, I'm writing her NY Post article for her so she can publish today's planned article without having to exert too much effort, (which for her seems to involve Pershing Square's copier more than anything). Even if she chooses to write her own story at least this one can serve as a guidepost for Ackman's remarks in case Celarier takes any glaring diversions in the article I'm expecting this afternoon.

In response to her question Ackman noted the structure of the convert was very interesting and was one that only a convertible arbitrageur would love. After patting himself on the back a bit by noting that setting up the hedge on the convert was difficult because borrowing HLF was difficult (I wonder why) he continued that those that bought the convertible were making a bet on volatility because they can make money if the stock went up or down.

He said HLF only did this because they couldn't get a loan and he added that Tim Ramey "the erstwhile analyst of Herbalife" said HLF would get $1.5B at 4% and that if they could have done so, that they would have done so. He characterized the convertible as an investment in which the investor is indifferent to whether or not the company succeeds so long as they can set up their hedge.

He also disagreed with Matt Levine's assessment of the situation (Ackman claiming the day end stampede was HLF's doing) and noted that the bottom line was that if there was going to be an LBO you wouldn't have done a $1B convert and that the deal was helpful to Pershing Square. He also quipped that the company was now a '"levered pyramid scheme."

When someone asked a follow up question about dilution he commented that there are fewer shares outstanding between $69-$83 and the same number of shares outstanding above $83. He added that the deal did not create any economic value, except to the banks.

At the conclusion of Ackman’s presentation, the co-chair of the conference (Mark Axelowitz) made a final remark on Herbalife and said.

“We all know what’s happening about Herbalife anyways. Carl just called me, he’s going to dump his shares.”
What Ackman failed to mention though was that the way the convert is structured that it is non-dilutive up to $120/share and furthermore that any additional buybacks by HLF would be accretive and "economically feasible" up to around $140/share after this deal.

I'm using economically feasible here only because HLF's CFO has said time and again that buybacks are all about economic feasibility. Before the deal, the feasibility was much less compelling at $80+/share, but now there is tremendous room on the upside for buybacks to continue. It is also noteworthy that HLF raised their leverage ratio in their credit agreement up to 3.5 for the next four quarters. With a current ratio floating just over 2.1 this implies that they're willing to take on more debt. That coupled with their recent BoD approval of $1.5B in buybacks, and the cash they generate quarterly leads me to believe we're looking at a minimum of $600M or so of share repurchases. That assumption also excludes the possibility of raising more debt or other methods of reducing the share count. I'm sure they'll lay out some details in next week's earnings call.

I'll be sure to tune in. 

And one last thing, The Boys & Girls Harbor, really is doing great things. I highly recommend that you set aside any disdain you may have for Bill's investment and faithfully donate to this very deserving organization.

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