When the Wolves Bite

by Scott Wapner

  With investors on Wall Street clearly betting with Icahn and the company, another key voice weighed in on what the outcome meant for Herbalife and its shareholders.

  Tim Ramey, the bullish analyst at Pivotal Research who had sparred with Ackman throughout his short campaign and had had a $90 price target on the stock for months, called it a profound victory.

  “The deal is consistent with our long-held view that while the company had had certain historic weaknesses in its compliance and oversight, it is a legal and ethical business model with the best-in-industry compliance function today,” Ramey said in his note. “This is a total victory for Herbalife shareholders and a total defeat for the short camp.”28

  Several months later, Ramey remained steadfast in his belief that the forced changes wouldn’t hurt Herbalife’s longevity.

  “I think what the detractors will find is that the new paradigm will not detract from the profitability of the model or detract from the growth of the company. It will still be a growth company with very strong operating metrics.”

  But while Johnson and the others may have publicly declared victory, within the hallways of Herbalife’s Los Angeles headquarters, there was no celebration or champagne corks flying through the air. The harshly worded FTC complaint had taken its toll on the company’s psyche.

  When specifics of the deal began to trickle out before 8 a.m., Herbalife knew it would spend the day attempting to control the message. Though Johnson and Icahn had made their defiant statements to the press, as if they’d read a different press release than the scathing and inflammatory one the FTC put out, big changes would have to be made.

  Beyond the $200 million fine, Herbalife would finally be forced to bifurcate its membership into “Preferred Members,” or those who signed up to get a discount on what they bought, and “Distributors,” those who were pursuing the business opportunity.

  Beginning in May 2017, Herbalife’s two hundred and fifty thousand distributors in the United States would be required to get receipts for what they sold to prove that at least 80 percent of the products went to actual customers or were used for personal consumption.

  The new standards didn’t end there.

  To make sure people who bought Herbalife products knew what they were truly getting into, every new member who signed up on the company’s website would have to say on the spot whether they were buying the product for themselves or to be a distributor. To make sure the company complied with the new regulations, the FTC said Herbalife would have to pay for an independent compliance auditor (ICA) to monitor the changes for seven years.

  The settlement also prohibited Herbalife from misrepresenting potential or likely earnings or claiming that members could “quit their job” to enjoy a lavish lifestyle.

  The news was sobering.

  Though Herbalife could finally move on after two years under the government’s microscope, the company disagreed with each and every charge made in the complaint.

  Johnson believed he’d cleaned up the company and that Herbalife had real customers and could easily prove it. In hindsight, if the company was guilty of anything, Johnson admitted, it was that it hadn’t changed the way Herbalife referred to its members immediately after David Einhorn had asked his pointed and probing questions about sales back in May 2012.

  As for Ackman, he remained convinced the new restrictions would ultimately cause the company to crumble, even feeling vindicated by how tough the FTC’s language was. Even so, he was left to question whether his strategy had been a mistake from the start—whether going public in the first place had hurt his cause.

  “Look, I can’t know for sure if we would have gone directly to the FTC would they have done something and it would have become a big, high-profile thing, I don’t know,” Ackman said. “It was dangerous to be short this stock without the news out there. One of the things that mitigated our risk, I thought, was making the short thesis public. We didn’t anticipate that Carl would come in and legitimize the bull case and make it into a short squeeze.”

  Ackman had made it clear by shorting even more stock that he wasn’t ready to give up. The only issue was whether Icahn would follow through on his longtime threat to squeeze Bill Ackman until he crushed him.

  15

  FINALE OR FAKEOUT?

  The thought of Icahn taking Herbalife private had hung in the air from nearly the beginning of the battle, ever since the investor had mentioned the “mother of all short squeezes” back in January 2013 in the infamous brawl with Ackman. Icahn had broached the subject several times with Michael Johnson, both on the phone and in person, with both men knowing nothing could happen until the FTC had finished its investigation. Now that it had, speculation was rampant about whether Icahn would actually follow through.

  Few had even considered that Icahn might have another idea up his sleeve altogether—to take himself out rather than the company.

  On Wednesday, August 3, 2016, Richard B. Handler, the chairman and CEO of the investment bank Jefferies, was walking on Manhattan’s Upper East Side when his mobile phone rang. It was Icahn, asking him to drop by his office on the corner of East 59th Street and 5th Avenue for a chat.

  Handler had done business with Icahn for years, often trading big blocks of stock for the investor, so it wasn’t uncommon to be summoned for a meeting. The men often spoke several times a week to talk about the markets or the world at large. Icahn enjoyed the exercise, often sitting back in his large leather desk chair overlooking Central Park while spitting out names in his investment book for Handler to assess on the fly.

  This time was no different, with Icahn shuttling through five or six stocks in his investment book, when he suddenly paused for a moment and mentioned Herbalife. The minute the name spilled off Icahn’s lips, Handler sensed something was out of the ordinary. He’d been through enough of these sessions over the years to know the ins and outs of Icahn’s inflection—the tone and pitch of his voice and how to read it. Handler instantly knew something sounded different. He also knew that Icahn could be cagey, even with those he liked and trusted.

  Icahn then asked a question that only confirmed Handler’s immediate suspicions. “Do I take the money and run?” Icahn asked, clearly fishing for some feedback from his friend. The two began brainstorming about a possible trade—how, and more important if, one would even work. “Let me see what I can put together,” Handler said, knowing it wasn’t going to be the easiest transaction he’d ever done. Icahn’s stake was huge—seventeen million shares—and Handler knew it would take some creativity and the right trading partner. If Icahn was going to sell, which was still very much unclear, a prospective buyer would have to be willing to swallow the whole position at full price. If there was one thing Icahn didn’t do, it was take a discount.

  With his mind turning about a trade, Handler left, headed downtown to his apartment, and thought of the one person who could potentially help make it happen: Bill Ackman. Since Handler didn’t have Ackman’s number in his cell phone, he called a banker back at the office and got it. The two had crossed paths once at an event but barely knew each other, with Handler only knowing what he’d heard and read.

  “Can we get together?” Handler texted Ackman the next evening in hopes of scheduling a quick face-to-face meeting. Ackman was out of pocket, traveling in Italy when the message appeared. He asked if the meeting could wait until the following week.

  “It really can’t,” Handler said, and the two agreed to speak by phone instead.

  “You and I don’t know each other,” Handler said to Ackman when they finally connected. “But I know Carl. I have no order, and this whole thing could be a pipe dream, but you have a problem with Herbalife, and I know the one guy who can get you out,” said Handler, alluding to Icahn. Stressing that the entire trade could fall apart at any time, Handler told Ackman the ground rules for making a deal. Icahn would sell his entire 17 million share block, worth more than $1.1 billion, with Ackman agreeing to buy nothing less than half of th
e position.1 Jefferies would then buy a quarter, with Handler taking the other piece to sell to institutions that might be interested in getting involved.

  But with Herbalife shares trading in the low $60s at the time, Ackman balked and countered with an offer of near $50 a share. Now Handler was pissed.

  “Don’t even start with me!” Handler said, getting more and more irritated with Ackman’s attempted negotiation.

  “How little can I buy?” Ackman then asked.

  “HALF!!” screamed Handler into the phone, making it clear the size wasn’t up for debate.

  Handler also didn’t have time to screw around. Since Icahn held a large block of stock, he was limited in how much stock he could buy and sell without his having to tell the world he was doing so. There was also a loophole in the law. Since Herbalife’s trading volume had spiked above a required threshold after the company’s settlement with the FTC, Icahn could sell in one fell swoop without anyone knowing. There was another issue too. Since Icahn was an insider and served on Herbalife’s board of directors, he was required to wait until after earnings to make a move, further compressing the time frame of what he could do and when. Since Herbalife had reported earnings on August 3, Icahn only had eight days to consummate a trade—and that’s if he even wanted to, which remained uncertain.2

  Ackman had his own timing issues. As much as he wanted to get Icahn out, he was also restricted lest he risk running afoul of the SEC, which could cause a delay in the trade if not kill it altogether. It wasn’t long before the whole thing looked like the longshot Handler had predicted in the beginning. There was also the issue of buyers. Handler wasn’t having much luck finding any, probably because anyone interested likely figured Herbalife shares would sink the moment Icahn’s ejection became public. Nonetheless, Handler continued to pound the phones while making it clear to the Jefferies market-maker who was trying to arrange the trade to keep him informed up to the minute.

  Sensing this could be his only real opportunity to get Icahn out, Ackman was growing impatient. “Where are we? Where are we?” he asked Handler several times over the course of the next couple of days.

  Though Handler was more convinced than ever that Icahn wanted to do a trade—even if he hadn’t put in an official order to do so—he was getting little traction in putting together a deal, especially since Icahn was unwilling to take a haircut on the price. The deadline to do a trade came and went without an agreement. Finally, on August 25, according to Fortune, Handler and his market-maker found enough buyers for 11 million of Icahn’s shares at $51.50 a share, well below the stock’s current price. Icahn said no, effectively killing the prospects for a trade.3

  Ackman wasn’t about to walk away quietly.

  The next day, on August 26, the Wall Street Journal broke the story that Icahn had “mulled” selling his stake to a group of investors that included Ackman.4 Shares dropped 7 percent on the report, to $57.60, with most assuming Ackman was the one who’d leaked the news to the Journal in hopes the stock would fall. He then decided to go public himself with the details of how the whole thing had come together in the first place.

  Later that morning, Ackman dialed into CNBC’s Squawk Box program to confirm he’d been contacted by Jefferies about buying a “few million” shares from Icahn’s position.

  “I think he knows this is toast,” Ackman said of Icahn’s alleged intent to sell his stake. “This is a confidence game. Carl is what creates the confidence in the company. If Carl sells, it can accelerate the demise of the company. I think the thing is over, and over quickly. The sooner he sells the better.”5

  When Icahn heard what Ackman had done on TV, he was livid. He hadn’t given anyone at Herbalife a head’s up that he was even considering getting out. Herbalife had heard rumors all week that something might be up but didn’t know exactly what. Eventually, there was enough smoke that Herbalife’s public relations executive, Alan Hoffman, pulled Michael Johnson into his office, and they nervously called Icahn’s right-hand man, Keith Cozza, to ask him directly if Icahn was a seller. Cozza said he had no reason to believe Icahn was, but also stressed that his boss could decide to do anything at a moment’s notice. Once Ackman went boasting on TV only days later that he had been contacted about Icahn’s stake, Hoffman called Johnson at home to tell him what had just happened and what Ackman had claimed. Blindsided, Johnson then called Icahn, who told him to call back at the close of trading on Friday.

  Herbalife executives spent the next several hours stewing over what Icahn might be up to—watching the clock and waiting for 4 p.m. Eastern to arrive—the time the market closed.

  At 4 p.m. sharp, Michael Johnson, Alan Hoffman, CFO John DeSimone, President Des Walsh, COO Rich Goudis, Executive Vice President Robert C. Levy, and Herbalife General Counsel Mark J. Friedman dialed Icahn’s office. Icahn’s assistant answered and patched the group in. Icahn said hello, then said to hold. After several minutes Icahn came back on the phone and said, “Well guys, I hate to tell you this, but I sold everything.”

  Silence took over the room as the men looked at each other, stunned by what Icahn had said.

  “Just kidding,” he then said, as everyone, including Icahn himself, broke into laughter. “Not only didn’t I sell, but I bought two million more shares,” Icahn revealed. “Lemme tell you my thoughts,” he continued, reading what appeared, to Hoffman, to be a statement. “What do you guys think of that?” Icahn asked.

  “Thanks for the vote of confidence,” a relieved Johnson exclaimed.

  Icahn then released the statement publicly, which ripped Ackman once again.

  “Ackman may be a smart guy,” Icahn wrote, “but he has clearly succumbed to the same dangerous (and sometimes fatal) malady that afflicts many investors—he’s developed a very bad case of ‘Herbalife obsession.’ It amazes me that a guy who hasn’t any knowledge of my internal investment thinking believes he is in a position to go on television to tell the world what I AM thinking! Amazing! He has no right to do so, and even worse, I’m sure his unsubstantiated, obsessive comments, especially about Herbalife, have cost investors a great deal of money over the last few years.”6

  Icahn also claimed that he had never put in a direct sell order in the first place, which a person at Jefferies later confirmed. It was only after Ackman went on TV earlier that morning that Icahn became incensed and decided to stick it to his nemesis once more by buying more stock rather than selling.

  “I went on to explain to make clear why we were buying. I thought it was bad for people to think we were trying to cover. That’s why I went on TV. In retrospect, it was probably a mistake,” Ackman said.

  Later that evening, once Jefferies corroborated Icahn’s story that he never took a bid, Ackman called Handler, who was up in Westchester, New York, screaming that he’d soiled his reputation publicly and threatening to release the original texts discussing a possible trade. Handler called Ackman a liar for downplaying the size of Icahn’s stake he was interested in and told Ackman the whole thing was “an act of war.”

  The two men finally settled down, with Ackman eventually offering an olive branch. He invited Handler and his wife to the US Open tennis tournament to sit courtside, which they did, in full view of a global television audience for four hours.

  On September 13, 2016, Icahn showed up at the Pierre Hotel for CNBC’s Delivering Alpha conference, where I asked him onstage about the whole ordeal. Icahn was coy, refusing to answer a question on whether he’d entertained selling out of Herbalife. He did reveal that he’d gotten permission to load up even further on Herbalife shares if he wanted to.

  “I am telling you that I’m not just playing games buying the stock,” he said, “Here’s a little secret for your show. I’ve asked permission—I’ve gone to the FTC to get accelerated treatment for the right to go to 50 percent, up to 50 percent, which is going way up. I only have the right to go to 35.”

  He then addressed Ackman.

  “So, Ackman loves to think that I’m going away. B
ut how do you go out on TV and say what a man thinks to someone else? I think it’s absurdity.”

  I then asked Icahn about the endgame—how this Wall Street war would end, and whether he’d take the company private once and for all, leaving Ackman beaten and bloodied.

  “I don’t have any stated intention to do it,” said Icahn, leaving the door open to changing his mind. “It’s something I have thought about. Doesn’t mean I will. And I think there are other people that might. I think Herbalife is certainly a candidate to go private.”

  Such a move was easier said than done, though, something Icahn knew as well as anyone. With Herbalife’s market cap near $5 billion at the time, Icahn would have to put up the value of his 25 percent stake as well as deploy billions of dollars in additional capital from either his own coffers or from a lender like a bank or private equity fund. Given Herbalife’s already high amount of debt and uncertain future following the FTC settlement, some, like Ackman, questioned whether the company could find a willing partner. Of course, Icahn could also find other large shareholders to join the effort. This was certainly a possibility, given the sizeable stakes both Stiritz and Michael Johnson owned, and the fact that the CEO would love nothing more than to participate in Ackman’s ultimate undoing.

  Ackman had other worries. On December 7, 2016, he released a new letter to his investors in which he revealed that Pershing Square Holdings was down 13.5 percent on the year, net of fees. He’d sold out of positions in Canadian Pacific and the animal health company Zoetis and had taken a new 9.9 percent stake in the fast-casual restaurant chain Chipotle at an average price of $405 per share. Ackman was betting that the company, which had been decimated by a customer revolt after an E. coli scare, could rebound.7