If it ever looks like I’m trying to tell you what Carl Icahn is up to with Herbalife, don’t listen to me. I have no idea. How could you? Icahn now owns ~13% of Herbalife’s stock with a ~$36 basis, and he is somewhat constrained from selling it in the next six months by short-swing profit rules. So he can’t sell. He can buy, of course. But after today he can’t buy more than 25%:
Herbalife today announced that it has reached an agreement with Carl C. Icahn …. As part of the agreement, Herbalife will increase the size of its Board of Directors from nine to eleven members immediately before the 2013 Annual General Meeting of Shareholders [and] will nominate two individuals to the Company’s Board of Directors, designated by the Icahn Parties and approved by the Company’s Nominating and Corporate Governance Committee.
Under the terms of the agreement, the Icahn Parties have agreed to, among other things, abide by certain standstill provisions and vote their shares in support of all of the Board’s director nominees. The Icahn Parties have the right to increase the size of their ownership position in Herbalife up to 25% of the outstanding common stock.
The standstill is for real; Icahn filed the agreement with his 13D/A and it’s an amusingly strong-form standstill that prohibits him from buying more than 25% of the stock, launching a tender offer, proposing a merger, ” encourag[ing] or facilitat[ing]” anyone else doing the same, or, my favorite, “request[ing] that the Company or any Representative of the Company, directly or indirectly, amend or waive any provision of this [standstill] (including this clause (g) [the one that says he can't ask]).” He can’t even ask to be allowed to ask to buy Herbalife!1
[Update: He also can't sell for 12 months. He already was somewhat restricted from selling at a profit for six months, but he had the flexibility to cut his losses if that became necessary. But his new agreement doesn't let him sell at all for twelve months unless the stock is above $73 for five days.]
The stock was up 7.6% today on the Icahn news, but: why? One possible endgame here has always been that Icahn would buy out Herbalife; that endgame has been more or less taken off the table. Yesterday the stock was a hedge-fund plaything where one of the players made noises about tendering for the whole thing; today he’s sworn never to even think about doing that. Seems to reduce the upside, no? I suppose it improves the odds of other upside outcomes:
While today’s announcement suggests Icahn will hold greater sway at Herbalife, a full acquisition may not be in the cards, Thomas Graves, New York-based equity analyst at S&P Capital IQ, said today in a telephone interview.
“It’s gotten people’s hopes up that there’s going to be a recapitalization or an accelerated stock-repurchase plan,” Graves said. “At this point, I’m not looking for Mr. Icahn to launch a full acquisition of Herbalife.”
Presumably with Carl Icahn on your board you’re more likely to look for shareholder value via financial engineering?
Also the standstill isn’t as draconian as all that. Icahn has two board seats and the standstill doesn’t limit “any actions or communications that may be taken by an Icahn Designee as a director of the Company.” So he can’t say “I want to buy the company,” or even “I would like you to let me talk to you about buying the company,” but I suppose he can say “as a board member, I think we should sell this company. To me.” Somewhat cheating, perhaps, but there it is.3
Or he can try to sell it to someone else:
Herbalife President Des Walsh said yesterday the company would “certainly” consider going private in a buyout “in the right circumstance.”
“There are many people who believe that obviously the value of the company is not represented by where the stock price is today,” Walsh said in an interview yesterday. “So some people have actually said that this is a company that actually would thrive in a private situation.”
Again, don’t listen to me, but one plausible interpretation of Icahn’s motives is that he wants board seats to agitate for and influence a recapitalization or a sale of the company to someone else – and that Herbalife were willing to give him those board seats to have an ally that process rather than an outside annoyance.4 Because if there’s one thing the Ackman/Icahn/Herbalife saga has proved, it’s that Carl Icahn’s desire and ability to annoy remains undimmed.
Herbalife to Increase the Size of Its Board of Directors and Nominate Two Icahn Representatives for Election to Board [HLF]
Icahn Capital Schedule 13D [EDGAR]
Herbalife to Add Two Board Members Chosen by Carl Icahn [Bloomberg]
1. Umm so there was a time in my life when I negotiated, like, a thousand standstills. You need this provision! It sounds absurd and everyone pushes back on it, but: if you don’t have it, then Icahn comes to you and is like “I want you to waive the standstill because I will buy the company.” Then what? You’ve got a fiduciary duty to consider it. You can get sued if you say no too quickly. You might even have to disclose that you’ve gotten the proposal. You’re screwed, that’s what. The standstill is worthless. Gotta have him say he won’t ask for a waiver.
Of course, what’s your remedy if he does?
2. Right? I mean … right?
3. He can also respond to any third-party attempt to buy the company, including with a tender offer of his own.