Investors betting on an Herbalife buyout shouldn’t hold their breath.
DA Davidson analyst Tim Ramey said a potential purchase of the controversial maker of protein shakes is “much more difficult” after the company’s auditor resigned this week over an insider-trading scandal.
Buyout speculation has helped keep the stock afloat ever since billionaire investor Carl Icahn entered the Herbalife fray. In February, Icahn took a 13 percent stake in the company, saying he would encourage it to consider strategic options, including going private.
Last week, KPMG fired senior partner Scott London, who is accused of providing tips about Herbalife, among other clients, to golf pal Bryan Shaw. As a result, KPMG resigned as the company’s auditor and said it could not stand by the past three years of Herbalife results audited by London.
Despite having no audited financials, Herbalife said it has been assured it will not be in breach of its debt covenants and will be able to release provisional quarterly earnings at its annual meeting on April 25 — points that Ramey said now make him comfortable the stock is still a buy. Yesterday, he reversed his earlier decision to downgrade the company.
But until a new auditor is hired and past accounts are re-audited by a new firm — which could take a year — the likelihood of a buyout has diminished, Ramey said.
Such a deal would be the surest way for Icahn to inflict pain on his nemesis, Bill Ackman, who has a $1 billion short on Herbalife.
A buyout would require all stockholders to tender their shares, forcing short sellers to cover. That now looks iffy.
“What happens to Carl Icahn’s strategy?” said investor Matt Stewart, who is also holds a short position in Herbalife. “What hedge fund, board of directors or other ‘interested party’ would sign off on an acquisition/recap of Herbalife, absent a seal of approval from a reputable accounting firm?”
A bogus report that London had tipped off Shaw about an impending buyout sent the stock up almost 3 percent Thursday, but it lost most of that yesterday when it became clear that London was merely speculating.