Coverage: Nutrisystem is sold for $1.4 billion

Tivity Health Inc. is buying weight-management firm Nutrisystem Inc. in a cash and stock deal the companies value at about $1.4 billion, the firms announced Monday.

Allison Prang of The Wall Street Journal had the news:

Tivity, however, lost almost a third of its market value as investors reacted negatively to the deal.

Tivity is the parent of fitness program SilverSneakers and focuses on customers aged 50 and older. Nutrisystem is the parent for both Nutrisystem itself and the South Beach Diet, a low-carb and high-protein eating plan. The companies said that combined, they would have had pro forma revenue of about $1.3 billion for the year that ended Sept. 30.

Tivity Chief Executive Donato Tramuto said on a conference call with analysts Monday that the companies complement each other and could be better at helping people manage their weight.

Investors are concerned, however, that it is unclear clear how Tivity will use Nutrisystem to sell into its customer base, Jefferies analysts said in a note. Investors are also worried about Tivity’s business model becoming more complicated and about a slowdown in revenue growth in Nutrisystem, the analysts said.

Joseph DiStefano of the Philadelphia Inquirer reported that Nutrisystem’s CEO will become Tivity’s president:

The merger plan calls for Nutrisystem chief executive Dawn Zierto stay on as Tivity’s president and chief operating officer, reporting to Tivity chief executive Donato Tramuto. (Zier, paid $4.7 million in cash and stock last year, owns more than $12 million worth of Nutrisystem stock, at the deal price.) And Nutrisystem’s Fort Washington office will remain open.

The deal includes a $45 million cancellation fee in case Tivity doesn’t close the sale. That’s about three-quarters of each company’s profits for 2017.

But Tivity also said it plans $30 million in yearly cost cuts, implying that it will terminate some Nutrisystem jobs, which totaled around 600 according to its last annual report. If Nutrisystem employees cost $100,000 a year, the cuts could include as much as half of Nutrisystem’s workforce. Tivity, which employed 475 at its last annual report, will borrow to finance the cash cost of the sale, analyst Kyle Mikson wrote in a report to clients of Cantor Fitzgerald, the New York-based stock brokerage.

The combination adds Nutrisystem’s packaged meals and its diet customers to Tivity’s SilverSneakers, Prime Fitness, WholeHealth Living, and flip50 health programs, which are used by insurers and health providers to encourage aging Americans to exercise more and eat better. Besides its flagship meal brand, Nutrisystem also owns the South Beach Diet and DNA BodyBlueprint lines.

Geert de Lombaerde of The Nashville Post reported that Tivity plans to cut $30 million to $35 million in costs:

Tivity CEO Donato Tramuto and his team expect to close early next year on their acquisition of Pennsylvania-based Nutrisystem. The deal will pair nutrition services with Franklin-based Tivity’s fitness and wellness offerings and grow the company’s top line to about $1.3 billion annually. In the 12 months ended Sept. 30, Tivity earned nearly $80 million while Nutrisystem posted profits of about $56 million. The latter’s operating margin in 2018 has been 10.0 percent while Tivity’s has topped 22 percent.

“Our combined platform has the potential to attract new users, increase enrollment, and enhance engagement among the loyal customers and members of both companies,” Tramuto said in a statement. “Many of the most common chronic conditions afflicting Americans today are associated with weight management, nutrition and physical fitness, and addressing both calories in and calories out is an important part of alleviating those conditions. […] We believe combining our two companies will create entirely new value propositions for our health plans, fitness partners, members and consumers.”

Combined, Tivity will employ about 1,100 people, with Nutrisystem being a slightly larger group in terms of headcount. Tramuto and his team expect to be able to cut between $30 million and $35 million from the combined company’s expenses on an annual basis by 2021.