Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.
The vast majority of stocks on our watch list are never acquired. Sometimes they implode and we're happy that a purchase was not made. Sometimes the corporations drift aimlessly on the list for years. Others turn and their stock price moves up multiples and we watch with woulda, coulda, maybe shoulda, kind of glazes. Of course that happens so often we are used to it and life goes on as other prey are acquired.
One stock that was on the Watch List but was never of significant interest for a host of reasons was Weight Watchers International (WTW-NYSE). This company feels as if it has been around forever and has a lively history to be sure. In 1999, H.J. Heinz sold the company to Artal Group for $735-million (U.S.). A couple of years later it took the outfit public and sold 48 per cent at a tidy profit.
However, its good fortune did not end there. The stock price was doing dandy but then slimmed with the recession, moving under $20. After that it quickly ballooned, heading over $80 in 2011. Artal saw an opportunity and having its management in place, decided that a Dutch auction, whereby Weight Watchers would buy back shares, was the ticket. The firm purchased $720-million of stock at $82 with Artal selling a portion of its stake, but keeping its ownership percentage. Much of the financing was through debt.
While a fantastic deal for Artal and those who sold, it saddled the corporation with a huge debt load and is a textbook example of the dangers of buybacks at inflated valuations. The stock price plummeted right after and continued falling regularly, touching a bony bottom of $3.67 this summer.
But lo and behold, a saviour in the form of Oprah Winfrey arrived this month, acquiring 10 per cent of the company for $43.2-million. In addition, she has an option to buy another 3.5 million shares for $6.79.
Her appearance on the scene excited investors. The stock jumped to life, moving from $6.79 on Oct. 16 (Friday) and closing at $13.92 on Oct. 19 (Monday) – the day the deal was announced. It then soared to a high of $19.94 within two days before backing off to the $16.50 range this week.
What has Oprah purchased? No question, the diet field is a growing market as America and the many other countries in which WTW operates wrestle with plumpness and obesity. But new competition has changed the field dramatically, much of it through smartphone apps and other high-tech products like FitBit. While Weight Watchers is also looking to compete via new technology, sales dropped from $1.8-billion in 2012 to $1.3-billion last year. Profitability has fallen in lockstep, with a loss two quarters ago, before a return to profitability this past quarter.
The company has a number of truly scary features for investors. The book value is about minus $23.50. Yes, you read that correctly, a huge negative book value, one that we rarely see when analyzing businesses. The debt load is a very fat $2.24-billion, an increase of around 150 per cent since 2011 and almost $1-billion greater than current revenues. Membership in WTW is down about 38 per cent from the 1.3 million recorded in 2011. Also, Artal is effectively calling the shots with its majority ownership and given its track record, one must wonder if its goals are aligned with other shareholders. Highly dubious, to be sure.
Another reason to avoid this corporation is that in 2013 the lovely dividend of 70 cents a share was eliminated. This was a wise move given the diminished form of the firm, but gee, one must question the intelligence of management when one year it is spending $720-million to repurchase shares and the next do away with what was a dependable dividend. It does not appear that it will be re-established in the near future.
Does Oprah really understand what she has purchased? While we have utmost respect for this woman and all that she has accomplished, perhaps she was blinded by the nature of her own weight problem and decided to buy in. As Peter Lynch stated, "Buy what you know," and no question this sector falls within her purview. Still, perhaps she did not appreciate well enough the problems with this investment. Fortunately for this mega-billionaire, even if she loses the skin she has placed in the game, it will not really affect her, except perhaps to stick in her craw. For lightweights like us, we perceive spending here as a possible value trap and will keep our distance.