Privatization Bid by Founder of Herbalife Draws Fire
Institutional shareholders of Herbalife International Inc. who stood by founder Mark Hughes despite occasional doubts about the efficacy of his nutritional products now are crying foul over his plan to take the company private.
Hughes said earlier this week that he plans to take the Los Angeles-based firm off the public market by purchasing all shares he doesn’t own for $17 each--a sharp premium over the stock’s Monday price but far below its level in recent years.
“I think the $17 price is ridiculous,” said Richard Todaro, portfolio manager at Kennedy Capital Management in St. Louis, which holds 600,000 shares. “The only ones making money on this stock are insiders.”
The anger over the buyout is the latest in a string of controversies that have dogged Herbalife since Hughes founded it in 1980.
Yet despite scrutiny of the firm’s products and sales practices, investors had pushed the price of the Class A shares, which have voting rights, above $32 in late 1996. As recently as the spring of 1998 the stock was at $27.
The share price has suffered recently as earnings have declined, which Herbalife blamed in part on overseas expansion costs and currency fluctuations. Foreign sales accounted for 40% of the firm’s $870 million in total sales last year. Earnings totaled $49 million, or $1.60 a share.
What’s more, analysts concede that shares of most nutritional-product sellers have been depressed amid uncertainty over regulatory control of some herbal supplements.
Still, many large investors insist that Herbalife is worth more, and some contend that Hughes, who controls 54% of the Class A shares and 58% of the non-voting Class B shares, has favored insiders over other shareholders.
“He did a lot of things to alienate investors,” said Gene Fox, managing director of Cardinal Capital Management in Greenwich, Conn., an Herbalife shareholder. Now “there’s no one else who would buy this company. If he doesn’t buy it, who else buys it?”
For its part, Herbalife noted that the offer was approved by a special committee made up of two of its outside directors and that it got an opinion from investment banking firm Bear, Stearns & Co. that the buyout price was fair.
“This transaction is in the best interests of our public stockholders and Herbalife,” Hughes said in a statement. “Herbalife has not been rewarded by the public equity markets in recent periods, and I believe that the conditions that may have contributed to this situation are not likely to change in the near future.”
The firm also noted that the deal must be approved by a majority of the shareholders other than Hughes. In addition, the offer makes available so-called dissenters’ rights, which could allow shareholders to make their case in court and seek a valuation of the stock from a judge.
In recent years, Hughes riled investors with a plan to sell one-quarter of his personal shareholdings in a complicated transaction that locked up the stock until 2001.
More aggravating for many shareholders was Herbalife’s decision last year to reprice about 7 million insider stock options from exercise prices of $14.24 and $14.40 a share to $6.63 and $8 a share, analysts said.
Although repricing of options isn’t uncommon when a company’s market price has plunged, public shareholders often lash out at such moves, arguing that insiders shouldn’t receive more favorable prices if the market is, in effect, criticizing their performance.
The options repricing “was the epitome of anti-shareholder,” said Bryant Riley, president of brokerage B. Riley & Co., which dropped coverage of Herbalife in June. “At the end of the day, you’ve got to evaluate management. Over time, we got less and less comfortable with these guys.”
Over the years, regulators from the Food and Drug Administration to the Canadian Ministry of Health have probed Hughes’ products and marketing techniques. Herbalife sells its products via an estimated 750,000 independent distributors who work in a multilevel pyramid.
In 1986, the firm agreed to pay $850,000 to settle allegations by California’s attorney general that it made false medical claims in its marketing of diet and nutritional supplements. FDA officials that year also objected to the sale of Tang Quei Plus, a pain relief tablet, and K-8, a pill promoted for its calming effects, because of “therapeutic claims” made by Herbalife.
Despite some shareholders’ criticism of the buyout plan, many say they expect to take it and walk away. Herbalife’s Class A shares, which closed at $12 on Monday before the offer was announced, have surged 26% to $15.06 on Nasdaq. The Class B shares have soared from $9.16 to $14.63.
Investor Todaro estimated the stock’s fair valuation to be in the “upper 20s” based on such factors as cash flow per share. But he said he would probably accept the buyout. “For what it’s worth, we’re happy to be taken out of our misery,” he said.
Herbalife, reacting to shareholders’ criticism, said through a spokeswoman that it “has always been committed to acting in the best interest of its shareholders, distributors and employees.”
