Who Will Win the Herbalife Battle?

02/22/2013 11:00 am EST

Focus: STOCKS

Is it a great, undervalued company or a multilevel marketing scheme? Stay tuned in this battle of two investing titans, says Ben Gersten of Money Morning.

The battle between hedge fund titans William Ackman and Carl Icahn over Herbalife (HLF) is becoming one of the most entertaining Wall Street clashes.

Icahn has fired the latest shot, revealing that he has a 13% long position in the nutritional supplement maker. He said the thinks the company is undervalued and has great potential. That can't be good news for Icahn's longtime nemesis, Ackman, who is betting heavily on Herbalife's failing.

Ackman announced a $1 billion short position in Herbalife on December 19. In a more than three-hour presentation the next day, he detailed why he believed Herbalife is a multilevel marketing pyramid scheme.

Icahn couldn't disagree more. In his latest regulatory filing, Icahn said he plans to have discussions with Herbalife management about business and strategic alternatives to enhance shareholder value, and also mentioned going private. Immediately, shares of Herbalife spiked 20%.
 
With Icahn's $214 million stake in Herbalife, the stage is set for an epic Wall Street showdown.
 
Icahn, CEO of Icahn Partners, and Ackman, founder of Pershing Square Capital Management, have a bitter history that started more than a decade ago when the two ended up in court over a real estate company. Icahn was forced to pay $4.5 billion to Ackman, and Icahn has never let it go.
 
Their feud led to one of the best segments in financial television history when the two bickered for almost 30 minutes on CNBC on January 25. "What I can tell you is, this is not an honest guy, and this is not a guy who keeps his word. This is a guy who takes advantage of little people," Ackman said of Icahn.
 
"He's the quintessential example of 'if you want a friend on Wall Street, get a dog,'" Icahn responded. "I appreciate you calling me a great investor, but unfortunately I cannot say the same."
 
After the interview, Herbalife dropped from $45 to $35 in one week. And the volatility the stock has seen is likely to continue.
 
The main problem Icahn says he has with Ackman over Herbalife is the aggressive nature in which he shorted the company. Not only did Ackman take a significant 20% short position, but according to Icahn, he did it in such an extravagant nature. He said that Ackman's short interest was just a "scheme."
 
Ackman said he started shorting Herbalife last May, when the stock was trading around $45. The average price of his shares is not known, but from the filings, it seems he made most of the purchases between $45 and $55.
 
When he announced his short position in late December, the stock was at $42.50 and quickly sold off, bottoming under $25 by Christmas Eve. Yet a short squeeze (a quick increase in a stock's price that forces short sellers to make margin calls and buy the stock to exit the short and cut their losses) sent the stock up to $46. This push was helped by Dan Loeb, founder of Third Point, who revealed an 8% long stake in Herbalife.

Now that Icahn has revealed his long position, which mostly consists of call options that he purchased when the stock was trading around $35, the pressure on Ackman and his short position is even higher. In fact, Icahn said Ackman could be in for the "mother of all short squeezes."
 
So far, Ackman has not backed off from his short, and remains confident in his position. "We invest based on a careful analysis of the facts. After 18 months of due diligence, we have concluded that it is a certainty that Herbalife is a pyramid scheme," Ackman said

"Our conclusions are unaffected by who is on the other side of the investment. Our goal was to shine a spotlight on Herbalife. To the extent Icahn is helping achieve this objective, we welcome his involvement."
 
Investors will have to stay tuned to see who comes out on top in the battle between the two titans.

Read more from Money Morning here...

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