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Will Bill Ackman face a 'short squeeze' on his Herbalife bet?

Herbalife Meeting

SUSAN GOLDMAN

A worker cleans the logo on the Herbalife sign as finishing touches are put on the company's building in Torrance, Calif. The company has defended itself against charges that it's a pyramid scheme.

Hedge fund manager Bill Ackman, who runs Pershing Square Capital Management, has taken a $1-billion-plus short position against L.A.-headquartered Herbalife, the diet and nutritional supplements company.

Ackman says Herbalife is operating a pyramid scheme: its business depends on signing up new suckers, not on actually selling products. He's pledged to drive the company, in the language of finance, "to zero."

Ackman's fellow hedge fund manager Dan Loeb is taking the other side of that bet. He's buying up Herbalife shares, whose value was depressed last year following a three-hour presentation (complete with 343 PowerPoint slides) by Ackman. 

Ackman is short. Loeb is long. And Herbalife is stuck in the middle.

But the situation is improving for the company. Last week it made its case, which included the fact that Herbalife has nearly $1 billion in cash on hand to execute buybacks of its shares. 

This is from Matt Egan at FoxBusiness:

Even though Pershing Square’s Ackman unleashed his assault on Herbalife over three weeks ago, analysts said the company couldn’t pressure short sellers with a buyback program due to a blackout period ahead of its February 18 scheduled earnings report.

[...]

The company has $950 million in buyback ability remaining under a prior authorization and last month said it expects to exceed a prior forecast to repurchase just $50 million in the upcoming quarters.

It seems highly likely that Herbalife will exercise considerably more "buyback ability," even as its share price rebounds. On Monday, it closed up more than 10 percent, at $44.08. That's a considerable improvement over the $26-per-share price it landed at on Christmas Eve. But it's an open question as to how much ground the stock still has to cover between where it is now and where Ackman built his position.

A lot of other short sellers evidently followed — or preceded — Ackman in short territory on Herbalife. This is from the Wall Street Journal:

Almost 35% of the company’s float was being shorted by the end of 2012, according to NYSE data released over the weekend. With all those bets made against the stock, anything pushing its share price upward could lead to a “mother of all short squeezes” as analysts are describing it.

The announcement of a share buyback this week could accelerate the squeeze. And at this point, barring something dramatic or a lousy earnings report, squeezed is what Ackman is going to be. Pershing Square has nearly $8 billion under management, but big losses on the Herbalife bet would definitely stress Ackman's fund. 

He has said, however, that he's never been more committed to an investment in his life -- even if that investment requires Herbalife to vanish before it pays off.

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