Carl Icahn Basically Just Going To Be A Vitamin Salesman Now

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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.]

So he's committed to being a large but non-controlling holder of Herbalife for the foreseeable future. Basically just to piss off Bill Ackman.2

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.

4.But if the company is sold in the next six months, Icahn will probably have to give up some of his profits, and taking board seats makes that more, not less, of a problem.

Related

Carl Icahn Still Thinks Bill Ackman Is A Bum, But That's Just, Like, His Opinion

There are many people in the universe who are fans of hedge fund manager Bill Ackman. They like his style. His charm. The way he makes them feel. The fact that he's not afraid to show his emotions or give them an honest opinion about their new dress or say "You know what? Those highlights really aren't working for you." Carl Icahn, however, is not one of those people. Save for a fleeting moment of supposed amicability following "a lengthy, boozy dinner," Icahn has viewed Ackman as a punk for nearly a decade; an untrustworthy little jerk who Ichan's friends supposedly told him not to do business with. (The feeling being more than a little mutual; as Ackman has put it, "The guy is a shakedown artist. His word is worthless.”) Anyway, in case anyone was wondering if the investors had put an end to their feud with another long, booze-filled meal, wonder no longer.

Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did: