Herbalife (HLF) Buyback Could Finally Force Bill Ackman To Cover Long-Standing Short Bet - S3

S3 Partners Managing Director of Predicative Analytics Ihor Dusanisky details the precarious position Bill Ackman and his Pershing Square Fund currently occupy, with regards to Ackman's estimated $988.38 million short-position in Herbalife Ltd (NYSE: HLF), following news HLF will initiate a "modified Dutch Auction." The transaction will allow Herbalife management to buyback $600 million of stock from $60 to $68 per share, while shareholders that tender their stock will also gain upside exposure to any acquisition or buyout over the next two years, via "contingent value rights" that accompany the cash payment for tendered shares.

Pershing Square is estimated to have 9% of their $10.982 billion AUM short HLF as of January 2017, making up roughly 75% of total short-interest in HLF, making this buyback announcement problematic for the Ackman's firm. Herbalife is focused on reducing the tradeable street float with this Dutch Auction, as Board Members, Executive Directors and Carl Ichan will not tender shares during this transaction.

If the Dutch Auction is fully tendered, there is a good chance that Bill Ackman will be on the receiving end of 3-5 million shares of stock loan recalls, the firm predicts.

This move by HLF management will reduce short-interest supply and increase the cost to borrow according to Dusanisky, commenting, "in addition to a drastic reduction in Herbalife stock loan availability, the cost to borrow Herbalife stock will increase dramatically after the Dutch Auction. Herbalife stock borrow costs hit a 5 year high of 7% fee in 2014, but after a successful Dutch Auction, Herbalife's stock loan availability will be significantly diminished. Stock borrow rates will spike much higher as borrow supply dwindles. When Herbalife’s excess stock loan availability disappears and lenders are forced to issue recalls in order to meet the settlement needs of its beneficial owners, borrow rates will increase. Depending on the amount of recalls that hit the street, and the increase or decrease in Herbalife short selling demand, borrow fees will climb to the 10% to 40% fee level... At today’s 2% borrow fees, Bill Ackman is paying approximately $63k in daily financing costs for his open Herbalife short position, but when stock borrow rates climb to 10%-40% his borrow costs will increase to $300k to $1.2 million of stock loan financing cost per day. The increased borrow cost may lower his net of financing Alpha to unacceptable levels."

Bill Ackman's estimated mark-to-market losses of $419 million year-to-date, have already erased $160 million of 2016 mark-to-market gains, while facing an increased potential for more losses, as the modified Dutch Auction will reduce HLF's float by 8.82-10 million shares. Yet, Ackman's bearish conviction remains high, given HLF short-interest has not dipped below the average levels from 2016. This modified Dutch Auction buyback represents welcome content for financial media in August and a flesh wound for Ackman, but far from the fatal blow Carl Ichan was looking for, when recent HLF buyout talks with a private-equity firm failed.

Source: www.S3partners.net

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