Bill Ackman: 'There Are No Incentives To Remain An Herbalife Distributor'
Herbalife Ltd. (NYSE: HLF)'s stock surged to a 52-week high of $72.22 early Friday morning after the company was not found to be operating an illegal pyramid scheme by the U.S. Federal Trade Commission (FTC).
Billionaire investor and hedge fund manager Bill Ackman initiated a short position in Herbalife around three years ago, and despite Friday's FTC announcement, he isn't ready to give up on his short thesis.
Ackman's hedge fund, Pershing Square, released a statement on Friday. The statement noted that as part of Herbalife's settlement with the FTC, it can now only compensate its distributors for "Profitable Retail Sales," which is a genuine sale made at a price above the distributor's average total cost of the product.
"In light of the fact that the FTC found that Herbalife distributors make little or no profit, or even lose money from retailing Herbalife products, there are no longer any meaningful incentives to become or remain an Herbalife distributor," Ackman wrote.
Ackman added that the agreement also calls for Herbalife to eliminate a minimum purchase requirement and other inventory loading incentives.
As such, Ackman expects Herbalife's revised business model to result in "structural changes" that will "cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business."
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