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Published 11 January 2013 12:10, Updated 14 January 2013 07:17
Pershing Square Capital’s founder, Bill Ackman, says Herbalife is based on a pyramid selling scheme. Photo: Getty
Two of the richest hedge fund managers in the United States are engaged in a billion-dollar battle over nutritional supplement company Herbalife. One of them is set to lose a huge amount of money.
The stoush has caused major fluctuations in Herbalife’s share price and threatens the future of the company’s many distributors, including those based in Australia.
The founder of $US11 billion fund Pershing Square Capital, Bill Ackman, has taken a $US1 billion short position against the company, arguing that Herbalife’s business model is unsustainable. Ackman outlined his bet against the company in an extraordinary three-hour PowerPoint presentation in New York to other investors on December 20. Herbalife’s share price fell over the following days from over $US40 to $US26.
“If I am right, its share price will go to zero,” Ackman said.
But a rival American hedge fund manager has come to Herbalife’s defence. Third Point’s Dan Loeb has called the attack “preposterous”. Third Point owns 8.9 million Herbalife shares, an 8.2 per cent stake.
Loeb has backed the stock after meeting with Herbalife chief executive Michael Johnson. The share price has since regained much of its losses.
The dispute revolves around the business model of the company. Herbalife says it operates as a multilevel marketing business, which uses its distributors to sell its products. There are about 2.5 million around the world in more than 80 countries, including many in Australia.
But Ackman says the company is a pyramid scheme where profit is built on the recruitment of new distributors. He says the company gives a misleading impression of how easy it is to make money selling its products.
Herbalife’s Australian operations are based in Adelaide. It is not known how distributors – who on-sell multi-vitamins, weight management supplements and skincare products – operate in Australia.
Herbalife’s Asia-Pacific vice-president of corporate communications, Daliea Mohamad-Liauw, would not provide specific details of the company’s Australian operations, including local distributor numbers or financial figures.