Why Ackman is scrutinizing Herbalife’s buybacks and repurchases

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Jul. 28 2014, Updated 1:00 p.m. ET

Ackman claims Herbalife is a “criminal enterprise”

William Ackman, the founder and CEO of Pershing Square Capital Management, issued a presentation on Tuesday about global nutrition company Herbalife Ltd. (HLF). He disclosed new evidence focused on the company’s nutrition clubs. He also called the company a “criminal enterprise,” adding that Herbalife’s CEO Michael Johnson was “a predator.”

However, Wall Street didn’t appear convinced by Ackman’s arguments. Herbalife saw its biggest gain, with shares surging 25% by market close.

On the share price increase during the presentation, Ackman alleged, “When there is really bad news like this, they will use all of the remaining fire power to buy back the stock to blunt the accusations.”

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He also added that the Securities and Exchange Commission should investigate the timing of Herbalife’s stock buybacks. Ackman claimed that Herbalife executives have sold $22 million in shares in the last three months, compared to $1 million in the previous 15 months since Pershing Square made its first presentation in December 2012.

He also said that the company’s extension of a share repurchase program in February “is a confidence game” and that the insiders have been selling during the company’s buyback programs.

Earlier this year, the company, accused of being a pyramid scheme by Ackman, increased its share buyback by 50% to $1.5 billion. It also announced a $1 billion sale of convertible bonds.

Herbalife said the initial purchasers of the convertible bonds, due August 15, 2019, will be Bank of America Merrill Lynch, Credit Suisse, HSBC, and Morgan Stanley.

In April, Herbalife stopped its quarterly cash dividend and said it would instead use the cash to repurchase additional shares during the second quarter of 2014. CEO Johnson stated, “Our strong sustained financial performance and the current market valuation of our shares make repurchasing stock the most attractive method of returning capital to shareholders and reflects our continued commitment to creating long-term value for our shareholders.” The move saw the backing of Herbalife’s largest shareholder and activist investor Carl Icahn who said on Twitter that the dividend decision was a “great move” and that it “confirms confidence in the future.”

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The company also entered into a deal in May with Bank of America Merrill Lynch to repurchase $266 million of its stock. Under the terms of the repurchase agreement, Herbalife said it would “pay $266 million from the company’s cash on hand and [would] receive a portion of the shares based on an Interim Share Delivery schedule, and the remainder upon completion of the program.”

The company also said it “is committed to enhancing shareholder value, which includes approximately $2.85 billion in total share repurchases since 2007.”

Besides Herbalife, some of the known multilevel marketing companies include Nu Skin Enterprises, Inc., (NUS), Usana Health Sciences, Inc., (USNA), Avon Products, Inc., (AVP), Tupperware Brands Corporation (TUP), and Amway. Among the peers in the multilevel marketing space, Tupperware has the highest dividend yield, which is currently at 3.43%, followed by Nu Skin at 1.98%.

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