Lack of Cash Forces Herbalife Exec to Scrap Plan to Go Private
Citing funding problems, Herbalife International Inc. Chairman Mark Hughes scrapped plans to buy the Los Angeles-based company and take it private, adding yet another chapter to the controversial history of the marketer of nutritional and weight-loss products.
The announcement Monday sent Herbalife’s two publicly traded stocks plunging, even though Hughes had earlier warned that he was struggling to obtain the necessary cash to complete the $223-million deal.
The buyout’s collapse becomes the latest adverse development in the history of Herbalife, which Hughes founded in 1980. Over the years the company’s marketing tactics and product claims have come under scrutiny by U.S. and state regulators--forcing Herbalife in at least one case to pay a sizable settlement. The buyout plan itself also prompted shareholder lawsuits that were settled by Herbalife.
Hughes, 44, announced the offer in September and planned to obtain mostly high-yield, or “junk,” bonds to pay $17.81 for each of the Herbalife Class A and B shares that he doesn’t already own. It was in effect a leveraged buyout, or LBO, whereby the buyer uses mostly borrowed cash to acquire the company.
He originally proposed paying $17 a share, but raised it by 81 cents a share in January to settle a shareholder lawsuit challenging the initial offer.
Hughes said he made the takeover bid because investors hadn’t “rewarded” Herbalife for its performance, leaving the company’s stock undervalued, and that the situation was not “likely to change in the near future.” Before he announced the bid, Herbalife’s stocks were trading for about $12 a share or lower.
But Hughes had warned as late as March 31 of “difficult conditions” in the credit markets. And on Monday he said in a statement that “the public high-yield debt market for companies in many industries has largely dried up, in my view due to investor attention focused on high technology, telecom and Internet companies, among others.” That left Hughes unable to get financing “on reasonably acceptable terms,” he added.
An Herbalife spokesman said the “company remains public and will continue with all of its strategies to grow and improve the business.”
The aborted proposal was costly for Hughes as well as Herbalife’s other stockholders. Hughes currently owns about 54% of the company’s voting Class A shares and 58% of its nonvoting Class B stock.
After his announcement, the Class A stock tumbled $3.13 a share, to $11.88, and the Class B stock plummeted $3.81 a share, to $11.06, both on the Nasdaq Market.
“It’s back to business as usual” for Herbalife now, said Scott Van Winkle of the investment firm Adams, Harkness & Hill Inc. in Boston, one of the few analysts who follows Herbalife.
He said the LBO plan “was probably a good idea” because so-called multilevel marketing firms such as Herbalife--which rely on armies of individual “distributors” to sell their goods to the public--generate lots of cash that makes it easier to pay down an LBO’s debt. “Unfortunately, he couldn’t find the financing.”
Herbalife sells a range of weight-loss, nutritional and personal-care goods through more than 1 million distributors in more than 40 countries. Indeed, about 70% of its sales last year came from overseas.
Herbalife’s 1999 sales totaled $956.2 million, up 10% from $866.6 million the prior year. But Herbalife sells its products to its distributors at a discount to the products’ retail prices, and the total retail sales for Herbalife products last year were $1.8 billion.
