RALEIGH — At the same time North Carolina and local officials were hailing 500 production jobs at a new Herbalife Ltd. factory near Winston-Salem, the nutrition and weight-loss supplement-maker’s stock began a sharp slide as a hedge-fund manager called the company a huge pyramid scheme.
Some of those same business recruiters said Friday they’re convinced landing the company’s jobs and seeing Herbalife buy and revamp a defunct Dell Inc. computer manufacturing plant remains a good deal. The company was promised about $10 million in tax breaks and other incentives from North Carolina, Forsyth County and Winston-Salem if it creates the jobs and retains them for up to 11 years.
“We structure our economic assistance based on performance,” Winston-Salem Mayor Allen Joines said. “They have to create the jobs, they have to create the tax base that they said they were going to in order for them to receive any financial help from the city.”
If the deal doesn’t happen as announced Wednesday, the tax breaks are reduced or erased and contract details require the company to refund any upfront cash, Joines said.
Herbalife said Friday it will gather stock analysts the week of Jan. 7 to rebut in detail claims by Pershing Square Capital Management L.P. founder and CEO William Ackman that the nutritional supplements company is a pyramid scheme.
Herbalife signs up independent distributors to sell its products. Those distributors earn revenue by selling products to customers and by collecting a share of sales and incentives for new distributors they recruit. According to numerous reports, Ackman claimed in a presentation Thursday that Herbalife is misrepresenting some of its financial information to disguise that distributors make more money from recruitment than from sales, which he says would define it as a pyramid scheme.
Ackman said he has been shorting the company’s stock for several months. Short sellers earn money when a stock declines.
Herbalife’s stock has lost 60 percent of its value since the end of April. Investors fled for the exits again Friday, driving down the company’s stock about 20 percent in afternoon trading on volume more than 10 times the normal level of daily share sales. That’s after the company’s share price fell nearly 10 percent Thursday and 12 percent Wednesday, when news of Ackman’s short position and other claims were disclosed.
Herbalife has repeatedly overcome similar allegations about the way it does business since its 1980 founding. The company’s profit grew 9 percent in the third quarter ending Sept. 30 to $117.8 million as sales increased to $1 billion for the period. The company says its sales will stay strong as a worldwide obesity epidemic increases demand for weight-loss products.
With North Carolina business recruiters reportedly in competition with a site near Atlanta for the plant, controversy over Herbalife’s business model “didn’t make any difference at all,” said Bob Leak, president of Winston-Salem Business Inc., a local business recruitment nonprofit.