Herbalife’s Supplement Supplier in Failing Health
A large Southern California nutritional supplement company is in dire financial trouble after losing much of its business supplying Herbalife International Inc. after the sudden death of Herbalife founder Mark Hughes in May.
Orange-based Global Health Sciences Inc. faces a Nov. 1 deadline to make a $12.4-million interest payment on $257.8 million in debt or it will go into default, according to Standard & Poor’s, a credit rating service that downgraded its assessment of Global’s health last week.
A default would threaten the company with bankruptcy, endangering more than 1,300 jobs at plants in Orange and Anaheim.
Global is owned by Richard Marconi, a longtime Hughes business associate and one of the first formulators of Herbalife products.
Herbalife also has quietly cut ties to another longtime Hughes associate, Michael E. Rosen. In June, the nutritional supplement company fired Rosen, a Herbalife executive vice president who once was Hughes’ reform-school advisor, and failed to renominate him as a director in July. Herbalife officials declined to talk about the break with Rosen, who was paid $3.4 million last year. Rosen could not be reached for comment.
Just three years ago, Global manufactured all of Herbalife’s nutritional products. The business relationship was still growing earlier this year, but soured after Hughes’ death following a four-day drinking binge.
Ironically, a portion of Global’s debt resulted from a buyout of Hughes’ interest in its predecessor companies for $43 million in 1998. Marconi was paid $38.6 million in the same transaction.
The moves to distance Herbalife from Marconi and Rosen appear to have been orchestrated by Christopher Pair, Herbalife’s former chief operating officer and also a longtime Hughes associate. He became chief executive shortly after the death. Pair declined to be interviewed.
Herbalife is a Los Angeles-based marketer that relies on a network of more than 100,000 independent distributors, most of them working part time, to pitch the company’s line of personal-care and weight-loss products to neighbors, co-workers and relatives. It has about 1,000 employees in Southern California and about $1 billion in annual sales.
Global could lose all its Herbalife business as early as January, according to Securities and Exchange Commission filings. Herbalife is actively shifting its business to other suppliers to “secure quality products at competitive prices.”
“Before Hughes died, they were close to reaching a new supply agreement with Global Health, but that has since fallen apart,” said Joel Luton, an analyst with APS Financial Corp. in Austin, Texas.
“Global Health is in dire financial peril,” Luton added.
Analysts said that without a cash infusion in the next two weeks, Global could be forced into bankruptcy or a massive restructuring, threatening the jobs of 777 permanent employees and 579 temporary workers at its Southern California factories. Global officials declined to talk to The Times.
Last month, Global hired Murphy Noell Capital of Westlake Village to help it work out a restructuring of the debt or to find investors willing to put cash into the company.
For two decades the fortunes of Global and Marconi were closely linked to Hughes. The Orange County businessmen helped Hughes create the first Herbalife products back in 1980.
Marconi also served as a key player and business partner in Herbalife’s growth. Hughes once called Marconi “one of the most brilliant men I know.” And early Herbalife marketing materials said Marconi was a “well-respected nutritional expert” and PhD who helped develop Herbalife Slim & Trim diet product. It turned out that Marconi’s degree was a mail-order doctorate from Donsbach University School of Nutrition, a non-accredited correspondence school in Huntington Beach.
But now Herbalife has put Global into a financial crisis. Herbalife accounted for $62.4 million, or 51.8% of Global’s $120.4 millionin sales through the first six months of this year. But the amount of Global’s Herbalife business is declining rapidly. In the second quarter, for example, Herbalife purchased $20.4 million in goods from Global, down 37.4% from the same period a year earlier. The debt was manageable as long as Herbalife sales were growing but turned into an albatross once Herbalife found other suppliers.
Global’s turmoil comes at a time when Herbalife’s management is working to boost the company’s profits and stock price. Herbalife shares rose 6 cents Thursday to close at $8.50. The shares have lost 41% of their value this year and 14% since Hughes died.
Through the first six months of this year, Herbalife’s sales rose 6% to $480.7 million from $452.8 million a year ago. Net income, excluding a nonrecurring charge taken in the first quarter, decreased 3% from last year to $23.3 million.
Analysts say the low share price, combined with the $110 million in cash the company has on hand make it vulnerable to a takeover. It has less than $10 million in debt.
Last month, the Mark Hughes Family Trust, which control’s 59.2% of Herbalife’s voting stock, rejected a $172.7 million bid for its holdings by Rbid.com, an Irvine-based Internet retailer.
“The stock is so cheap right now it looks like an excellent target,” said Scott Van Winkle, an analyst at Adams, Harkness & Hill in Boston.
Outside shareholders have also suggested that Herbalife could increase the its share price by using some of its cash to repurchase shares.
Herbalife officials declined to talk about their efforts to increase the share prices. In a written response to The Times, the company said it planned to increase the stock price “in several ways, not the least of which is by continuing to focus on further improving the growth and profitability of the company. We are also working on better communicating what we are doing, as well as our vision for the company, with Wall Street.”
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Global Health’s Sales Drop
About a year ago, Global Health Sciences derived nearly 60% of its revenue from Herbalife. Since the May 21 death of Herbalife founder Mark Hughes, Global’s year-over-year sales have dropped 14.6% and losses have almost tripled. Comparison of second-quarter numbers for 1999 and 2000:
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Sources: Securities and Exchange filings
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Slimmed Down
Herbalife International shares have dropped 39% this year and 14% since the May 21 death of company founder Mark Hughes.
Herbalife shares (ticker: HERBA), weekly closes and latest on Nasdaq
Thursday: $8.50,
up 6 cents
Source: Bloomberg News
