Buyout Bid Juices Herbalife

Editor's note: This Breakout Stocks Alert was originally sent to subscribers Feb. 5 at 9:37 a.m. EST. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

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Herbalife (HLF - Cramer's Take - Stockpickr) received a takeover bid Friday after the close, and we'd like to update readers on the implications. The stock is trading sharply higher to $39.50, and we are moving it to a Two rating and trimming 200 of the 550 shares in the Breakout Stocks model portfolio.

Private-equity firm J.H. Whitney issued a proposal to acquire Herbalife for $38 a share in cash, a 15% premium to Friday's closing price. Whitney actually took Herbalife private in 2002 with another private-equity firm, Golden Gate Capital, before taking it public in December 2004. Whitney owns 27% of Herbalife's stock, and its managing partner, Peter Castleman, serves as chairman of Herbalife's board of directors. So Whitney has a good understanding of Herbalife's business.

We have written numerous times that Herbalife could be an attractive takeover target because of its hefty cash flow, which would allow the company to support a lot of debt. Accordingly, Whitney expects to raise $2 billion in debt financing for this deal.

After trading above $41 a share in November and December last year, Herbalife shares fell as low as $29.25 in January when the company lowered 2007 revenue guidance. The weaker outlook stemmed from difficulties in Mexico, though Herbalife kept earnings guidance intact. This slump in the share price has given Whitney an opportunity to attempt to take the company private ahead of Herbalife's expected approval to begin network marketing in China.