Herbalife investor liquidating stake: partners who got shares appear to be selling.

J.H. Whitney & Co., once the majority shareholder at Herbalife Ltd., is liquidating its remaining 27 percent stake in the Los Angeles supplement maker in the wake of its failed attempt earlier this year to take the company private.

Whitney quietly distributed its shares among the approximately 100 partners of its Whitney V LP fund early last month, according to regulatory filings. And those tracking the stock say the extraordinarily high volume of trading in subsequent weeks suggests that most of the partners are selling their shares.

The liquidation has come as Whitney Chairman Peter Castlemen left his position May 23 as chairman of Herbalife, leaving Chief Executive Michael Johnson in firm control of the company, holding both the CEO and chairman titles.

As a result of Whitney's liquidation, no institutional holder owns more than 4 percent of the company. The largest remaining Whitney V partner, Prairie Fire Capital LLC, which is controlled by Castleman, now holds less than 2.3 percent of shares, making it only the fourth-largest shareholder.

The change has been generally applauded on Wall Street, where several analysts saw the huge Whitney stake as an overhang on Herbalife's stock price.

Douglas Lane, an analyst with Avondale Partners LLC, said that the private equity firm's liquidation was not unexpected given that the Whitney V fund was seven years old--on the mature side for a private equity fund--and had little incentive to remain a shareholder once its buyout bid was rejected.

"It wasn't a surprise that this might happen, only that Whitney did it so rapidly," Lane said.

Calls to J.H. Whitney for comment were not returned.

Fall sell-off

J.H. Whitney, a Connecticut firm established in 1946 by industrialist and philanthropist John Hay Whitney, was a pioneer in the U.S. private equity industry.

Whitney V, which was funded in 2000, took Herbalife private in 2002 for $685 million, in partnership with another private equity firm. Herbalife, which sells weight loss, supplement and personal care products through a multilevel marketing distributor network, had struggled since the sudden death of charismatic founder Mark Hughes in 2000.

A year after recruiting Johnson, a former top executive at Walt Disney Co., Herbalife went public again in a 2004 offering. In February, Whitney made a $38-a-share bid to again take the company private, just a few weeks after problems in its Mexican operation caused Herbalife to issue a warning about 2007 sales that sent shares plunging. But Whitney was unable to win over a special board committee of independent directors. In April, the offer was rejected as too low.

A.G. Edwards & Sons Inc. analyst Andrew Speller in an investors note suggested that Castleman and Whitney dumped more than 17 million shares on the market all at once to punish the company. But Johnson and other company officials characterized the liquidation as disciplined and measured, with the Whitney partners finding ready buyers for their shares.

Herbalife shares, which had jumped to $41.18 on April 26 after an upbeat earnings report, lost more than 6 percent in early May. Shares have since nearly recovered, closing at $40.25 on May 31.

Johnson was full of praise for Castleman, and Castleman associate David Halbert, another board member who submitted his resignation at the same time. Johnson noted that when Castleman came on hoard five years ago he was quick to allay the concerns of distributors fearful that a private equity firm would dismantle the company and its distinctive multilevel marketing structure.

"He gave them a lot of confidence that he was here to build the company along with them, and make them partners and fellow investors in the business," said Johnson, who added he was eager to take over the chairmanship at Herbalife. "I'm ready for the role and very excited. We're very well situated now."

Johnson has been widely credited for leading a new management team--including some old Disney hands--that had enabled the company to earn $143 million in 2006 after losing $14.3 million two years earlier.

The company under Johnson has aggressively pursued foreign sales and now operates in 63 countries. At the same time it has tried to polish its image back home as a maker of healthful products. One tack has been to sponsor various sports teams.

Mexican stumble

Still, the company has stumbled, including last year when lax control over certain Mexican distributors caused dissention among other distributors, prompting the company in January to slash its sales projections for the year. Mexico is the company's largest market after the United States with annual sales up 200 percent in the last three years to $600 million.

But developments this spring reportedly led the special board committee to conclude the company was worth more than $38 a share. Those included an enhanced sponsorship deal with the Los Angeles Galaxy soccer club, which recently signed superstar David Beckham. And in March, the Chinese government granted permission for the company to sell products using its traditional independent distributor format, instead of being restricted to hybrid retail stores.

Prospects also are looking brighter south of the border. The same day the company announced Johnson's chairmanship, it announced the hiring of Adriana Mendizabal--a former Kodak executive with extensive experience working with Mexican distributor networks--as president and managing director of Herbalife's Mexico and Central America region.

And while there has been a trend among public companies to separate the chief executive and chairman roles, analysts contacted by the Business Journal did not express concern about Johnson's enhanced power, noting that a greater alignment of board and management may be helpful for the company at this stage of growth.

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By DEBORAH CROWE

Staff Reporter

Herbalife
Shares have recovered after a 6 percent drop.

May 31, 2006           $39.06

May 31, 2007           $40.25

Note: Table made from bar graph.