These are the approximate market value exposures, as best I can tell (stock $50 and puts $8):
Ackman = $660M total (asymmetric reward to $1.5B; short 10M shares = $500M plus long Jan ’15 $50 puts on 2oM shares = $160M)
Icahn $850 million (17M shares) and Stiritz $350 million (7M shares) (symmetric risk/reward).
What’s more important in news and journalism today, a tantalizing headline or accurate information? I keep hearing the media report “Bill Ackman’s Billion Dollar Bet…” There it was again the other day in the article from Bloomberg here. That’s been Herbalife’s mantra, too. Except the company refers to it more colorfully as “Reckless Billion Dollar Bet by a Billionaire Bad Man.” In this video clip featuring the ridiculously speculative Bob Chapman, at 1:11 in the video, as he is ranting on, you can hear a CNBC studio person in the background say “love it!”
Intelligent business reporters know that George Soros himself had nothing to do with the fund investment in Herbalife, yet they repeatedly flash his face and name on the screen. Would a reporter ever ask Carl Icahn a series of really uncomfortable questions about Herbalife’s business methods or, for instance stop him dead in his tracks when he says something as ridiculous as “Herbalife provides jobs to Spanish people”? Would they ask him a hypothetical question: if he wanted out, could he even sell 17M shares? Of course not. And of course they wouldn’t ask. He’d put them on the black list for headline grabbing interviews. This is not news, it is infotainment. The reporters know they’re misleading and misreporting the facts for the headline grab. Take for instance the Bloomberg article I referenced, where the reporter acknowledges that Ackman’s position is in fact put option premium, but then goes right on to say “Billion Dollar Bet.”
As I’ve written about before here, Ackman initially invested $1 Billion shorting the stock, adjusted to that “error”, turning away from the oncoming truck, and restructured into long dated, out of the money put options. (In that post, I originally thought it was all put options, but it appears it is majority put options.) A great move to avoid potentially imminent investment death and also the benefit of a much better risk/reward profile.
Piecing together various reports and his own words, if Ackman is short 10M shares and owns Jan 2015 $50 puts on 20M shares, his current market exposures are roughly $500M and $160M, respectively. Total market value exposure is $660M or less than 5% of his $14B funds and the option premium is just above 1% and has an asymmetric reward payoff. If his thesis is correct and Herbalife goes to $0 the payoff is $1.5 Billion (less the $160M market value of premium.)
Any losses he took in 2013 covering his short to avoid the squeeze (several hundred million, temporary i would agree, yet he was solidly positive for the year) are yesterdays news. He came roaring back this year, is up 25% net through June 30, 2014 and has a great long term record. As he keeps reminding Stephanie Ruhle, don’t worry about Bill Ackman and his LP’s. He’s a big boy.
At this point in the game, Ackman is the investor with the least amount of capital at risk ($660M) and the most to profit ($1.5 billion, minus whatever losses already taken). Icahn has $850 million and Stiritz has $350 million at risk (minus mark to market losses). By my back of the envelope, Herbalife would have to get over $130 and get 17 million shares liquid for Icahn to profit $1.5 Billion. That’s a story worth writing about, no? For Stiritz to make a proportional $1 billion from his average cost around $60+… well, like the Lotto ads say “Hey, ya never know.”