First and foremost, the company's surging stock — up 11% over two days after a report that it held talks to go private — has cost the Ackman-led Pershing Square Capital Management roughly $115 million on a mark-to-market basis, according to data compiled by the financial-analytics provider S3 Partners.
And Ackman could be in for more pain because of Herbalife's decision to execute a so-called modified Dutch auction, through which the company plans to buy back $600 million in shares at $60 to $68 a pop. Beyond that, all shareholders who sell back their stock will get an additional cash payment if Herbalife is acquired at a higher price than the auction range in the next two years.
The buyback of 8.8 million to 10 million shares could "actually squeeze Ackman out of some of his shorts," S3 says. He first started accumulating his position five years ago while accusing Herbalife of operating as a pyramid scheme. S3 estimates that if the Dutch auction is fully tendered, Ackman could face 3 million to 5 million share-loan recalls. After all, he makes up roughly 75% of the company's short interest.
But it doesn't end there. Once the number of Herbalife shares available to be loaned plummets following the auction, the cost to borrow the company's stock will "increase dramatically" to 10% to 40% from about 2%, according to S3.
So to what extent will that hurt Ackman's wallet? He now pays about $63,000 a day in financing costs, but that could skyrocket to $300,000 to $1.2 million a day once the auction is complete, S3 says.
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