New Position: Blyth Inc. (BTH)

Is a “Short Squeeze” On The Way?

I built a 1/2 sized position in Blyth Inc (BTH) today, January 21, 2014. The shares are trading at 52 week lows, and there are some actionable catalysts to alleviate what I believe is a severe mispricing in the shares leaving the company valued at $156 million. (Authors Note: I doubt many folks are reading this post so I’m not worried about a jump in price given I still have a bigger position to build. Writing helps me clarify my investment thesis in my head.)

Let me be clear: Blyth is a direct selling business, of the sort by which some would call a multi level marketing or network marketing company. I won’t get into the ethics of this type of business model: I discussed the notion of a so-called pyramid scheme in a post yesterday.

Blyth is comprised of three principal business units: (1) it’s ~80% share of Visalus, a nutrition and supplement direct seller; (2) PartyLite.com, a candle and home decor direct seller; (3) online and catalog businesses, generally under the Miles Kimball brand name. After a period of astonishing growth at Visalus, the business is suffering revenue declines, as is Partylite.com. I think both are temporary and am betting on a return to growth in these businesses as they expand internationally and reinvigorate their distributors. This apparent erosion of the underlying businesses is likely a large part of the share price decline, not to mention short sellers questioning the veracity or legality of the business model.

What caught my interest in Blyth was the fact that 51% of the shares are owned by insiders, collectively the Goergen family who has run the business since the 1970′s. The large portion of shares are owned by other successful investors, including Joseph Harrosh (~10%) and Ahmet Okumus (7%). Due to the tarnished image of network marketing companies in general after noted investor Bill Ackman laid out his short thesis that he believes Herbalife (HLF) is operating as an illegal pyramid scheme. Throw in two declining businesses at Blyth (but that appear to be at an inflection point), and Blyth shares have been crushed by short sellers.

Enter CVSL, run by John Rochon of Mary Kay fame. He famously took Mary Kay private in the mid 1980′s in a management led buyout and grew the direct seller from $500 million to $3 billion in sales annually. Mr. Rochon has a demonstrated record of success in the direct selling industry, and is using CVSL as a publicly traded holding company to acquire niche direct sellers, leveraging its infrastructure.

In a conference call on September 26, 2013, Mr. Rochon said this regarding CVSL’s intention with respect to Blyth:

We have one final question, which is probably most appropriate for John Rochon. And the question is “I see that it is now public information that you have taken a less than 5% position in Blyth. Would you please give more color on the extent of your interest? How you might finance anything? And have you contacted management?” John?

John Rochon: Okay. Well since (audio interference) question, as you all know, from a legal standpoint. So let me say this. First of all, the shares that we own are owned by CVSL. They’re not owned by related entities. All of the purchases that we’ve made have been open market purchases. You know, I think, from what appears to be some credible [news] comments about our activity here that we are below 5% still, and we are today. We would like to be a large shareholder of this Company. We have a comfortable and industry-appropriate relationship with the leadership of Blyth. I think that we have a common interest and those interests are certainly to maximize the value of both of our companies’ shares. Our investments are almost always long-term investments and I believe that Blyth is going to be a long-term investment for CVSL.

Note that Mr. Rochon said CVSL investments are “almost always long term.” Maybe it won’t be here. Mine certainly is not. I am looking for a major pop in the share price at levels of risk I can accept at the current $156 million market capitalization relative to what I believe underlying value to be.

Subsequent to this public statement, CVSL offered $16.75 per share to acquire the public float of Blyth, and would roll the Goergen’s equity interest into CVSL. Details of the offer are vague, but the Goergen’s indicated they did not want to follow that course of action. In my view, they’d prefer cash for their Blyth shares.

The story does not end there. Multiple CVSL press releases indicate that an “amplified” offer has been extended and that CVSL has engaged an investment banker to line up a $500 million war chest for targeted acquisitions. Could it be that CVSL is about to offer $500 million cash for Blyth? I could even see Herbalife entering the bidding process to (1) acquire a competitor (Visalus) at a discount, then selling the remainder pieces, maybe to CVSL and/or (2) to show reviled short seller Bill Ackman that shorting direct selling businesses stock is not to be trifled with.

Either way, an epic “short squeeze” portends. Amazingly, over 5 million shares remain sold short which could eclipse the public float. If a takeover offer is extended and accepted at higher prices (say $22 or so), short sellers could be caught in an infinite squeeze to close their short position. Google “Volkswagen short squeeze” and you will see what I mean.

Will the epic squeeze happen? It’s not a 100% certainty. But I’m allocating some capital to the idea, and am incredulously watching these amazing corporate events unfold. This is what makes the stock market and investing fun; finding anomalies in situations where risk is muted, and rewards are amplified.

This could be one hell of a firework show.

Happy Hunting.
Mike