Herbalife Management Conflicts Of Interest Questioned By Investment Groups
This article was originally published in The Tan Sheet
Executive Summary
Herbalife execs' dual responsibilities as directors of the firm and trustees in the estate of its founder could produce "serious conflicts of interest," two investment groups charge in a July 24 letter to the board.
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Herbalife execs' dual responsibilities as directors of the firm and trustees in the estate of its founder could produce "serious conflicts of interest," two investment groups charge in a July 24 letter to the board. Steel Partners (New York) and Jana Partners (San Francisco), which together control 3.9% of the firm's nonvoting "B" stock, question whether President/CEO Christopher Pair, Exec VP/Chief Business Affairs Officer Conrad Klein and Chairman John Reynolds are "exercising in good faith their fiduciary duties to the company." The investors express concern over rumors of buy-out offers rejected by the company - including one in the last two months - as well as other rumors the firm is considering selling out to Pair, Klein and Reynolds. Jana Partners characterized the sources of the rumors as credible. The three Herbalife principals are executors of the Mark Hughes Family Trust, which controls 56.9% of the Class "A" stock in the company and 34% of the "B" shares, according to a recent filing with the Securities & Exchange Commission. Hughes, who died last May, failed in his attempts to take the company private (1 (Also see "Herbalife" - Pink Sheet, 24 Apr, 2000.)). "We would recommend that the board immediately initiate a fair auction process for the sale of the company to the highest bidder," Steel and Jana say, with the assistance of "a nationally recognized investment bank." They suggest the firm continue to buy back excess shares in the market in the meantime. In addition, the "board should investigate apparent or potential conflicts of interest that any members of the board might have," they demand. The groups also cite "long-term employment agreements with [Pair, Klein and Reynolds] for exorbitant salaries and...aggressive golden parachutes." In response, Herbalife issued a statement assuring Steel and Jana its board "regularly reviews...many of the subjects as to which you have expressed concern" and stressing, "it is not our policy to comment on rumors." The groups explain they were prompted to publicly announce their misgivings due to "the alarming direction the company has taken" since Hughes died. The investors cite weak 2000 financials, including a 27% drop in earnings before interest, taxes, depreciation and amortization, a 38% decrease in the "B" stock price and a "stunning" $357.8 mil. in marketing, distribution and administrative costs in 2000; that is in comparison to $339.6 mil. in 1999 and $306.6 mil. in 1998, according to SEC filings. Herbalife's second quarter domestic sales were flat compared to the prior-year period at $118.2 mil., while sales throughout the Americas rose 4.9% to $155.8 mil., the company reported in an analysts conference call July 26. Disappointing results in the Asia/Pacific Rim region - which saw sales drop 24.2% to $135.8 mil. -dragged down overall sales 6.3% to $413.4 mil. for the quarter. Sales in the Asia/Pacific Rim region were adversely affected by unfavorable currency exchanges, the multi-level marketer pointed out, noting sales in the Far East declined about 14% in local currencies. Nevertheless, the firm said it was pleased with the performance of its South Korea operations, sales for which grew 5% in local currency compared to the year-ago quarter and 39% in consecutive-period retail sales. In Europe, retail sales rose 7.4% to $114.2. mil., while local currency sales increased 14%. Herbalife credits the launch of the Thermojetics high-protein/low carbohydrates diet plan products as an important factor for growth in the region. After accounting for distributor payments as well as handling and freight income, total sales fell 6.3% to $255 mil., leading to a 13.8% slide in net income to $10 mil. The earnings drop occurred despite successful efforts to scale back spending, Herbalife asserted. For instance, second quarter cost of sales as a percent of net revenues dropped to 24.1%, compared to 24.7% in the year-ago period, the firm reported. Herbalife also said it cut spending on marketing, distribution and administration 3.5% to $88 mil. over the three months. The firm reported similar efforts for the first quarter (2 (Also see "Herbalife" - Pink Sheet, 30 Apr, 2001.)). During the teleconference, Herbalife also addressed the recent bankruptcy of Global Health Sciences and its subsequent acquisition by NBTY (3 (Also see "NBTY Global Health Sciences $40 Mil. Acquisition Approval Pending" - Pink Sheet, 30 Apr, 2001.)). The firm said it has replaced the manufacturer with several suppliers with no effect on its offerings. GHS failed shortly after Herbalife - which represented about 51% of its business - ended their relationship (4 (Also see "Global Health Sciences Future Product Purchases "Unlikely" - Herbalife" - Pink Sheet, 22 Jan, 2001.)). |