Ackman's mettle tested as Herbalife battle rolls into year two

Fri Dec 20, 2013 3:19pm EST
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By Svea Herbst-Bayliss

BOSTON Dec 20 (Reuters) - Hedge fund billionaire William Ackman is facing mounting pressure as his high-stakes bet against nutrition and weight loss company Herbalife enters its second year, but for now, his investors look ready to stick with him.

The founder of Pershing Square Capital Management has seen the value of his $1 billion short play against Herbalife lose nearly three-quarters of a billion dollars in 2013, making it one of the 10-year old fund's riskiest bets.

And if equity analysts and his billionaire rivals, Carl Icahn and George Soros - who own chunks of Herbalife stock - are right about the company's growth prospects, that bet could look even worse in the next several months.

After an audit by PricewaterhouseCoopers gave Herbalife's books a clean bill of health this week, one year after Ackman publicly called the company a pyramid scheme, analysts said it was only a matter of time before Herbalife buys back shares.

This prompted D.A.Davidson & Co. analyst Tim Ramey, a long-time Herbalife bull, to raise his price target for the company's shares to $115 from $92. Janney Montgomery Scott analysts, meanwhile, lifted their price target to $85 from $79.

That is a far distance from the $33.74 where the stock closed a year ago on December 20, 2012 the day Ackman made his allegations plus his prediction that regulators would shut the company down. His presentation and speculation the day before that he was short the stock had pushed the stock price down 21 percent in two days.

Even in the face of a 137 percent stock gain since then, Ackman has said he will take his short bet against the company "to the end of the earth" - a clear sign he intends to hang on to the position.

And investors who know Ackman's history say the 47-year old can be patient. He waited three years before getting out of his losing J.C. Penney bet and seven years before his bet against bond insurer MBIA paid off. To guard against investors getting cold feet and leaving him too quickly, he forces them to lock up their money longer than many others, something analysts say makes sense for his activist strategy.   Continued...