Pershing Sticking To Its Short On Herbalife

Ackman's Past Short Bets Backfire

An estimate by Fortune calculated following an FTC settlement the company announced in mid-2016 suggests Ackman may have shorted 20.2 million shares and would have lost about $500 million on his short bet — taking into consideration the actual loss if he had bought back shares to cover his short positions, the cost of maintaining the short positions, marketing campaigns he undertook to discredit Herbalife and the money spent on videos accusing the company of misconduct.

Ackman has been highly critical of what he claims to be the pyramid scheme run by the company. Allegations against the company include recruiting of new distributors to augment earnings of the top 0.1 percent and about 99 of the distributors earning less than minimum wage and about 86 percent of the distributors earning $0.

FTC Settlement To Pressure Earnings

In its annual update presentation document dated Thursday, Pershing Square said it is short on Herbalife, which accounts for 9 percent of its capital. Pointing to the $200 million settlement agreement Herbalife had with the FTC, Pershing said the injunctive relief demanded by the FTC will pressure the company's earnings.

Other Problems

Among the other problems Pershing noted were slowing international growth; the SEC probe on the company's corruption compliance in China, in which the DoJ is also involved; management turnover; negative sentiment toward MLMs and the ongoing forex headwinds.

Stock's Torrid 2016

The presentation also referred to the 100 percent stock price decline in 2016. However, the funds noted that the company's stock appreciated due to recent events including perception of a more lenient MLM regulatory regime under the new administration and Credit Suisse marketing $1.325 billion credit facility to support refinancing.

However, the buoyancy is tempered by recently reported fourth quarter revenue miss, reduced guidance and a new SEC China investigation.

Concluding, Pershing said it remains short Herbalife because it believes intrinsic value is meaningfully below the current share price. The hedge fund believes a buyback is likely to be value destructive on a fundamental basis.