Description

Investment Thesis:

• Weight Watchers International, Inc. (NYSE: WTW) presents an attractive capital structure play by going short the common equity and long the 1st lien term loan B-1.
• WTW is an over-levered and poorly operated consumer weight loss services company that is past its prime and has seen a slew of digital competitors enter its market, resulting in deteriorating fundamentals across almost all of its operating metrics.
• Management has missed several large trends such as the digitization and personalization of weight management and has had several managerial missteps including: 1) the poorly thought out business strategy of pushing monthly meeting passes, 2) executing an extremely value destructive share buyback in 2012, and 3) acquiring overvalued WTW franchises in an attempt to hide abysmal organic growth.
• As a result, management has thrown the company into a downward spiral.
• The leveraged loan markets already have shown their lack of confidence in a management-led turnaround as the term loan B-2 is currently trading at 56, well into distressed ranges.
• Weight Watchers has struggled since the stock peaked in the $80s per share range in 2012. Just over the past 52 weeks, the stock price has plummeted, currently trading at $8.46 per share, only at 28.4% of its 52 week high of $29.84.
• In fact, on February 26, 2015 (the day of the Q4 2014 earnings call), the share price declined 35% as management gave abysmal 2015 EPS guidance, guiding towards half of what analysts were expecting.
• As will be shown, WTW’s 1) over-levered balance sheet and impending maturities, 2) poor management team that lacks a turnaround plan and transparency, and 3) foreign exchange headwinds in Europe will create a “perfect storm” of catalysts which will continue to drive the share price lower and lead the company into bankruptcy.
• What makes this WTW investment even more interesting is that the recent deterioration of the business and plummet of the share price has also dragged down the price of the 1st lien term loan B-1.  The 1st lien term loan B-1 currently trades at 89 and has an outstanding principal of $292.3m. However, its maturity is in less than one year (matures on 4/2/2016) and the fact that WTW currently has more excess cash on hand than the outstanding principal (as well as an undrawn $50m revolver), the company should have little trouble paying off the term loan B-1.
  • Note: the term loan B-1 will most likely have to be retired via cash as no lender would be willing to refinance into a structurally or temporally subordinated position with respect to WTW’s $2.1 Bn term loan B-2 (due in 2020).
• Should the company be unable to pay the maturity of the term loan B-1 with cash on hand or additional funds from the fire sale of assets, the company may even resort to an equity raise. This would greatly dilute existing shares and further erode the share price.
• In my base case, this total investment should result in approximately a 52% return within 12 to 18 months with ~35% return from the depreciation of the common equity along with an attractive ~16.4% yield from the term loan B-2 being taken out at par.
• Should WTW be unable to repay the term loan B-1, the company could prematurely be thrown into Ch.11 bankruptcy, resulting in a near 100% return on shorting the equity as the shares are delisted. Given that the term loan B-1 is the most senior tranche of debt, there is a significant margin of safety in receiving a similar yielding security or post-reorg equity as WTW exits bankruptcy.  

Situation Update:

• WTW was once hailed as the “greatest private equity deal of the century” (Source: Forbes). It was purchased by The Invus Group/Artal SA in 1999 and subsequently IPOed on the NYSE in 2001.
• Due to the fact that Invus is a family office, and therefore not constrained by the usual 7 to 10 year private equity fund life, it has been able to perpetually execute large dividend recapitalizations throughout the years.
• On a MoM basis, this deal has yielded over 10x.  
• The Invus Group/Artal SA still owns 51% of the equity today.
• Previously, WTW had significant market share, a strong brand, and an asset-light strategy, and as a result the management did not in technological developments in the weight management services sector and failed to improve their product offerings.
• The company has struggled in recent years due to an inundation of competitors into the weight management services market, including free weight management apps (MyFitnessPal) and activity trackers (FitBit, Jawbone, Nike Fuel Band).
• Furthermore, management initiated the strategy of aggressively advertising monthly meeting passes (~$43 per month or $9.50 per week) as opposed to the pay-as-you-go option (~$14 week) in order to receive weeks paid fees up front and offering what seemed like a 47% discount.
• The decision to push monthly passes has led to a dramatic increase in portion of weeks paid that are attributed to monthly pass sales but also resulted in declining attendance given that individuals who pay week to week are more likely to be motivated and continue to keep with the WTW program. This can be evidenced by how WTW’s attendance has been deteriorating from a high of 62.0% attendance in 2009 to 48.3% today.       
•  Meetings are critical for three reasons:
  • 1) The meetings reinforce the behavior modification that enables weight management results
  • 2) Continued attendance of meetings results in customer subscription of more meetings
  • 3) The meetings also serve as a channel for WTW to sell its ancillary products such as branded snacks and publications (which are higher margin, since the customer has already been acquired).
• This can evidenced by how products sales revenue declined from $442.7m in 2011 to $298.0m in 2014 at a CAGR of (12.4%).
• However, WTW’s management has failed to recognize this important fact and chose instead to push its monthly passes to lock in sales from paid weeks.
  • This decline in attendance further impacts in-meeting product sales which account for approximately 12.0% of net revenues.
  • These declines in weeks paid and meetings attended have caused several financial metrics to enter downward spirals.   
  • YoY organic sales growth, which peaked at +20% YoY in Q1, Q2, and Q3 of 2011, drastically slowed to approximately 2.5% in 2012 before entering free-fall. Most recently, the YoY organic sales growth for Q1, Q2, and Q3 2014 were -16.9%, -16.8%, and -13.5%, respectively.
  • Due to deleverage from the top line, WTW has experienced nonstop YoY gross margin attrition since Q2 2013, with the most recent Q4 2014 figures coming in -500bps less than the previous year’s Q4. Operating margins have seen a similar trend.
  • WeightWatchers.com revenue growth has steadily deteriorated due to the overabundance of free calorie-counting apps and fitness trackers. From a peak YoY revenue growth in Q2 2011 of 70.0%, growth has entered free fall, with the most recent Q1, Q2, and Q3 YoY revenue growth figures at -12.0%, -16.0%, and -15.0%.
• These declines in WTW’s operations can also be seen in its web traffic trends.
  • Over the last year, WTW’s daily page views/visitor and the daily time on site has decreased by has declined by over 4.0%. Search visits have declined by 12.0% (Source: Alexa.com).
  • In contrast, NutriSystem’s daily page views/visitor has increased by 9.0% and the daily time on site has increased by 4.0%. Search visits have increased by 9.0%.
  • Furthermore, the most common website viewed after weightwatchers.com, or the bounce destination, is a NutriSystem related website.

• While this deterioration was happening, WTW showed continued growth within the North American operations segment by acquiring various franchises. By doing so, WTW was allowed to count the attendance at acquired meeting sites as “growth” and book the revenues at 100% of meeting fees (as opposed to 10% royalty fee).
• In 2012 and 2013, WTW spent $30.1m and $83.8m on franchise acquisitions. As of FYE 2014, WTW’s balance sheet showed over $799.8m of Franchise Rights Acquired (a goodwill line item). Much of this amount is attributable to value-destroying acquisitions in which WTW overpaid for franchises.    
  • In fact, starting in 2013, WTW began to take write-downs on its Franchise Rights Acquired totaling $5.4m in 2013 and $26.7m in 2014.  
• In addition to poor management decisions which have lead to business deterioration, WTW suffers from an over-levered balance sheet.
• WTW executed a value-destructive $1.5 Bn share buyback via a Dutch tender auction in 2012 when the share price was trading at an all time high in the $80s. This has left the company with an over-levered balance sheet, currently at 6.5x leverage. Given the near term maturities of its $295mm 1st lien term loan B-1 in 2016, and its $2.1Bn 1st lien term loan B-2 due in 2020, the company will have to undergo a complete turnaround (and quickly) to be able to refinance such an enormous quantum of debt.
  • To be able to refinance this massive amount of debt, WTW would need to be able to regain the financial health and stability it had when it took out the $2.1 Bn of debt.
  • It is highly unlikely that WTW will be able to do this for several reasons such as:
    • 1) The weight management services sector has fundamentally shifted from “diets,” which are inherently fad and trend driven to general “health and wellness.”
    • 2) WTW’s refusal to innovate and remain relevant has left it to be perceived as a “diet.”
    • 3) Management’s refusal to innovate their digital product offerings has left it effectively unable to differentiate and compete against free apps that perform the same function (such as MyFitnessPal, which has over 75 million users worldwide).
    •  4) WTW’s most attractive market in terms of growth is Continental Europe, which faces detrimental foreign exchange headwinds. Also, 40% of WTW’s revenue mix is distributed across the UK and Continental Europe.
• The high yield markets have already shown their lack of confidence in a management-led turnaround given that the 1st lien term loan B-2 is trading at 56.    
• These factors have led the management team to suspend WTW’s quarterly $0.18 dividend in Q3 2013.

Valuation:

• WTW trades at a 7.0x LTM EV/EBITDA and a 10.7x Fwd. EV/EBITDA multiple (Adj. EBITDA is expected to decrease 35% from $361.7m in 2014 to $235.4m in 2015.
• WTW trades at a forward P/E of 14.3x. However, the P/E ratio is not the best metric for valuation given how levered WTW is (debt-to value ratio in excess of 84%).
• WTW’s closest comparable is NutriSystem (NasdaqGS: NTRI) which trades at 14.6x LTM EV/EBITDA and a 10.9x Fwd. EV/EBITDA multiple and has zero debt.    
• Whereas WTW’s return on capital has declined from 35.1% in 2013 to 20.1% in 2014, NTRI’s return on capital grew from 14.8% in 2013 to 34.0% in 2014.

Capital Structure and Liquidity Considerations:

• WTW is significantly levered, at approximately 6.5x, due to a poorly-timed share buyback from its financial sponsor, The Invus Group/Artal SA, in 2012. To fund the buyback, the company took out a $2.1 Bn 1st lien term loan B-2.
• The company’s current debt includes:
  • $50mm revolving credit facility with an interest rate of L+225, currently undrawn
  • $295mm 1st lien term loan B-1 with an interest rate of L+300, due in 2016 and trading at 89, YTM of 16.4%
  • $2.1 Bn 1st lien term loan B-2 with an interest rate of L+325, due in 2020 and trading at 56, YTM of 17.8%
• Although the quantum of debt is significant, the debt itself is covenant-lite and only has a 1% mandatory amortization and does not have a debt-to-EBITDA ratio maintenance covenant. Management guidance has indicated that the firm will not sweep excess cash into deleveraging, and instead invest in growth initiatives.

Why the 1st Lien Term Loan B-1 Will Be Taken Out at Par:

• While shorting WTW’s common equity itself offers an attractive return, investing in the 1st lien term loan B-1 further enhances returns on the upside and decreases potential losses on the downside.
• This investment assumes that WTW will be able to take out its term loan B-1 with certainty on April 2, 2014 for several reasons:
  • 1) The principal on WTW’s term loan B-1 is $292.3m, which is less than the $301m cash on hand at FYE 2014
  • 2) Management has repeated guided towards aggressively managing costs to achieve a cash balance of at least $350m by FYE 2015.
    • While I do perceive this as an aggressive estimate, my WTW’s model indicates approximately a cash balance between $315m and $325m by FYE 2015, depending on the operating case.
  • 3) Management has an undrawn $50m revolving credit facility
  • 4) Throughout the past two years, management has removed several channels that were outflows of cash
    • WTW’s no longer is making frivolous acquisitions of its franchises
    • Management suspended the quarterly dividend of 18 cents
  • 5) Lastly, the $2.1 Bn covenant-lite term loan B-2 also serves as a reason why the term loan B-1 will be paid off.
    • Although the $2.1 Bn term loan B-2 represents a significant quantum of debt, it does not present a immediate threat today due to three characteristics:
      • 1) The maturity of the term loan B-2 is in 2020
      • 2) It has very minimal 1.0% mandatory amortization
      • 3) There are no maintenance covenants
    • These factors allow for financial flexibility and essentially give management a long-dated option on turning the company around. WTW was once a $7.0 Bn company and management truly believes that it can return the company to a similar state.
    • Therefore, come hell or high water, management will retire the term loan B-2 by any means necessary to preserve its optionality, even if it includes an additional equity raise (which would further dilute share price and drive returns).
  • Failure to repay the term loan B-1 could prematurely throw the company into Ch.11 bankruptcy, resulting in a near 100% return on shorting the equity as the shares are delisted. Given that the term loan B-1 is the most senior tranche of debt, there is a significant margin of safety in receiving a similar yielding security or post-reorg equity as WTW exits bankruptcy.  

Recent Guidance and Poor Management Execution:   

• During the Q3 2014 earnings call, management expressed its confidence that 2015 will be an inflection in recruitment trends.
• During the Q4 2014 earnings call, CEO Jim Chambers explained that he “was disappointed to say that [WTW is] not yet where [it] expected to be, and that [their] turnaround will take longer than [they] had anticipated.”
• Given that there is usually a 1 year lag between the time when the company stabilizes recruitment trends and sees growth in revenue, the earliest one could expect growth in the top line would be sometime 2017.
• Furthermore, there has been poor hiring and firing decisions, especially in regards to Lesya Lysyj (former CMO of Heineken) who CEO Jim Chambers hired to serve as President of North American Operations.
  • Lesya Lysyj was brought on by Jim Chambers in October 2013 who touted her “tremendous experience in building and turning around well-known consumer brands.”
  • She was subsequently laid off in February 2014 (Source: Q4 2014 earnings transcript, WSJ).

Proposed 2015 Growth and Turnaround Initiatives (Too Little, Too Late):

• Instead of addressing the deteriorating business fundamentals in its core areas (meetings attendance and weeks paid), management has come up with several optimistic “Hail Mary” initiatives to stabilize the business.
• Unfortunately, all said initiatives represent too little, too late.   
  • WTW has attempted to address the trend of increasing personalization of weight management by offering one-on-one advice to members through their Personal Coaching program. The company will also offer greater personalization between live meetings and Expert Chat, a 24/7 virtual one -on-one support platform.
    • The launch of the Personal Coaching and Expert Chat offerings required extensive software capital expenditures to develop their technology platform and field operations.
    • Over 4,000 of WTW’s service providers had to be trained for this service and the underlying scheduling and communication technology platforms to bring live member interactions into the digital setting.
    • As of the Q4 2014 earnings call on February 26, 2014, the penetration of the Personal Coaching and Expert Chat offerings were much less than management predicted, only achieving a 3.0% penetration rate across all WTW members.   
    • The problem with these ancillary services is that they mainly offer ways to increase revenues from existing customers, as opposed to recruiting more individuals.
  • Management has addressed issues by aggressively managing expenses such as scaling back marketing expenses through less TV advertising and achieving efficiencies in digital marketing. The company has also found additional opportunities to cut operating expenses by reducing the number of drop in hours at its locations. Over 2013 and 2014, WTW had cut $150m in general and administrative costs.
    • However, marketing spend is crucial at this point in time as WTW attempts to rebrand itself from a mere “diet” company to a general health and wellness company.
    • Although, cutting marketing expenses may allow WTW to hoard cash in the short run, it almost undeniably will impact its future success.
  • In a response to the popularity of activity trackers, WTW recently partnered with FitBit in Germany where FitBit is marketing WTW services to its customer base and allowing WTW to sell FitBit products in the company’s weight management meetings. WTW has also begun to integrate its technology into other wearables including the Jawbone Fitness Tracker and the Sony SmartBand.
    • This decision raises several red flags.
    • First, it reveals WTW’s own wearable device, the ActiveLink, is unpopular with consumers. This fact is confirmed just by looking at the ActiveLink device. It is a clumsy and cheap looking wearable, as opposed to the more sleek and functional FitBit or Nike Fuel Band.
    • Second, WTW management has inflated expectations that they will be able to gain member recruitment from existing FitBit owners.
    • Lastly, the question remains why has FitBit only approved of a partnership to cross sell FitBit devices and WTW services in Germany? Foreign exchange headwinds aside, any potential success with Germany and the Continental Europe market will be muted due to its miniscule size in comparison to the North American market, as Continental Europe only accounts for 16.9% of total meeting attendances and 7.2% of total paid weeks.
  • WTW sees an opportunity to transform from a B2C company to B2B company by offering its services to corporations and managed healthcare companies.
    • As healthcare costs continue to present itself as a significant concern for employers, WTW sees opportunities to serve the corporate market and help companies reduce their healthcare costs and improve the overall well-being of their employees. WTW continues to aggressively spend on software capital expenditures to enhance the company’s technology capabilities related to its B2B healthcare business.
    • In early 2015, WTW announced a partnership with Humana giving all Humana members in qualified employer-sponsored health plans free access to 6 months in WTW through an integrated health and wellness program. Although several companies have signed on including American Express, Accenture, DTE Energy, Humana and GEICO, this business only represents about $30m of revenue, approximately 2.0% of total revenues.
  • Fanciful guidance from management’s Q4 2014 earnings call indicates that they believe additional revenues from this B2B initiative will ultimately account for $300mm of revenue in 2018.
  • To achieve management’s target of $300m in revenue for the B2B segment, B2B revenues would need to grow at an annual CARG of 77.8% from today through 2018.
  • This is extremely unlikely for a multiple reasons.
    • On the Q4 2014 earnings call, when management was asked whether Humana would consider giving members a deduction on healthcare premiums, it was revealed that Humana has not, and most likely will not, offer any deductions.
    • Merely offering WTW’s service for free does not incentivize individuals to participate and stay with the WTW program, as individuals lack “skin in the game”.

Lack of Transparent Reporting and Guidance from Management:

• WTW’s management has developed a notorious reputation of not being transparent in their operations, guidance and reporting.
  • As previously mentioned, WTW delved into the habit of acquiring franchises within North America to be able to book the acquired franchises’ members as “growth.”
  • Management also has developed a reputation as “sandbaggers” on earnings calls, often drastically understating guidance to show significant beats on EPS.
    • This can be seen in the consecutive Q1, Q2, and Q3 of 2014 where WTW beat earnings estimates by 244.4%, 27.3%, and 41.7%, respectively.
• One suspicious long-term theme of WTW’s reporting is the scant regular publication of operating metrics, particularly in regards to membership of monthly pass members.
  • For the FYE 2014 10-K filing, WTW neglected to report weeks paid and member attendance statistics.
  • Management also changed revenue segment reporting form separating out physical meetings and Weight Watchers Online revenues to combining them under one umbrella line item, “Service Revenues.”     

Foreign Exchange Concerns:

• Foreign exchange risk with respect to the Euro is a serious concern given that approximately 40% of WTW’s business is located in abroad.
• As the ECB undergoes quantitative easing, and the threat of a Greek exit looms about, WTW’s operations may be severely impacted.
• Morgan Stanley estimates that on an annualized basis, a 5.0% relative decrease in the value of the euro to the U.S. dollar would negatively impact WTW’s EPS by 2.0%.    

Returns Analysis:

• Current Share Price: $8.46
• Base Case: Target Share Price of $5.49
  • 35.1% upside from equity
  • 16.4% upside from 1st lien term loan B-1
  • Total Return: 51.5%
• Bear Case: Target Share Price of $10.50
  • (24.1%) downside from equity
  • 16.4% upside from 1st lien term loan B-1
  • Total Return: (7.7%)
• Bull Case: Target Share Price of $4.07
  • 51.9% upside from equity
  • 16.4% upside from 1st lien term loan B-1
  • Total Return: 68.3%

Appendix:

Company History:

• Weight Watchers International, Inc. (NYSE: WTW) is a 50 year old global-branded consumer company providing weight management services and products across 25 countries including the U.S., United Kingdom, Germany and Australia.
• Each week, approximately one million members attend over 40,000 WTW meetings which are run by more 10,000 leaders, each of which have lost weight on the WTW program.
• The company operates through both company-owned and franchised operations.
• WTW was originally founded in 1961 when founder, Jean Nidetch, began holding weight-loss meetings with a group of her overweight friends in the basement of her New York City apartment. The group’s success quickly spread and the company was officially launched in 1963.
• Weight Watchers International was incorporated in 1974 and soon afterwards, it was acquired by the H.J. Heinz Company in 1978.
• In 1999, Weight Watchers was acquired in a corporate carve-out LBO transaction by The Invus Group/Artal SA, a European financial sponsor, and was subsequently IPOed on the NYSE in 2001.

Business Model and Segment Overviews:

• Weight Watchers derives its revenue from weekly meeting fees, internet subscription products sold on WeightWatchers.com, products sold at meetings, licensed products sold in retail channels, and magazine subscriptions.
• The company’s unique offering is its weight management program which is focuses on “power foods” that are low in energy density through its PointsPlus (or ProPoints in certain geographies) system where each food has a PointsPlus value determined by a unique formula based on the food’s protein, carbohydrates, fat, and dietary fiber content. The formula takes into account how these nutrients are processed by the body as well as their impact on satiety.
• Customers following the system and can eat any food as long as their PointsPlus values of total food consumed remains below their respective “budgets.” Since nutritious foods generally have lower PointsPlus values, this system guides customers towards healthier and sustainable eating habits.
• In FYE 2014, consumers spent approximately $5.0 Bn on Weight Watchers branded products and services.
• It is critical to note that WTW is one of the most clinically studied commercial weight management plans, having over 80 peer-reviewed publications in the last 20 years.
  • In 2012, a clinical trial funded by the National Institutes of Health (NIH) found that, over a 48-week period, individuals following the WTW system on average lost more weight than individuals following a program administered by healthcare professionals preceding a period of time following WTW.  
  • In 2013, a randomized controlled study conducted by the Baylor School of Medicine and published in the American Journal of Medicine found that overweight and obese adults following WTW lost significantly more weight at six months than those who tried to lose weight on their own.
• Meetings Segment (~$745mm, 50.3% of Net Sales in 2014):
  • The group support system is the cornerstone of WTW program’s efficacy and its success. WTW administers its weight management program in weekly meetings of approximately one hour in duration. Meetings are conveniently held throughout the day in various civic or community centers or space leased in retail centers. In these meetings members provide each other with mutual support and learn strategies for healthy habits that support sustainable long-term weight management.
  • The payment structure for WTW’s meetings is either through monthly or pay-as-you-go weekly subscriptions. The monthly passes offer unlimited access to meetings at a price of $42.95/month (approximately $9.50/week), while the weekly subscription fee is $14.00. The company’s payment mix has significantly changed in recent years where over 75% of meeting paid weeks and member attendances are derived from monthly pass sales.    
• Internet Revenues (~$437mm, 29.6% of Net Sales in 2014):
  • Through WTW’s online platform, WeightWatchers.com, the company provides two subscription services: 1) Weight Watchers Online and 2) Weight Watchers eTools.
  • Weight Watchers Online is an offering utilizing WTW’s approach to weight management and targets the self-help inclined individuals by offering online and mobile content, personalized resources, and interactive web-based management plans. Weight Watchers Online costs $65.00 for an initial three 3 month term or $48.90 for an initial one month term. Subsequent monthly costs are $18.95 per month. As of 2014, WTW has approximately 1.7 million active Weight Watchers Online subscribers.
  • Weight Watchers eTools is the digital accompaniment to WTW’s weekly meetings for customers that want to manage the day-to-day aspects of their weight management plan online of via their mobile devices. Weight Watchers eTools costs $34.95 for an initial three 3 month term or $14.95 for an initial one month term. Subsequent monthly costs are $14.95 per month. Weight Watcher’s eTools is provided free of charge to members on a monthly meeting pass.          
• Product Sales and Other (~$298mm, 20.1% of Net Sales in 2014)
  • WTW sells a wide range of products including nutrition bars, snacks, cookbooks, food and restaurant guides with PointsPlus values, PointsPlus calculators, fitness kits, and ActiveLink, an activity monitor that tracks activity throughout the day. This segment also includes income from WTW’s franchises, from which WTW receives 10% of franchisee’s meeting fee revenues.   
• Industry Overview: Although the greater weight management market is extremely large, estimated to be $62 Bn in just the U.S. alone, it is better define Weight Watchers’ market as the global commercial weight loss services market. The reasoning for this is to remove the noise and effects of other sub-industries such as gyms, health, and fitness clubs, supplement industry, and weight management through surgeries. The commercial weight loss services market is a $4 Bn industry broken down by and online services segment (~$1.5 Bn) and an offline segment (~$2.5 Bn).
  • WTW has the second leading market share of 19.4% in the online segment, behind NutriSystem (Nasdaq: NTRI) which has a 27.5% market share. The company with the third leading market share is Jenny Craig with 14.4% market share. The remaining 38.7% of the market is held by smaller, fragmented players. This market mainly provides meal delivery services and subscription-based weight management planning. This industry is expected to grow at a CAGR of 1.7% from 2014 through 2019.
  • WTW has the leading market share of 45.0% in the offline segment, ahead of NutriSystem with 13.8% market share and Jenny Craig with 13.1% market share. The remaining 28.1% of the market is held by smaller, fragmented players. This market mainly provides nonmedical weight management services through individual or group counseling, menu and exercise planning, and weight and body measurement monitoring. This industry is expected to grow at a CAGR of 1.1% from 2014 through 2019.  
  • Aside from disposable income, the largest driver of growth in this industry is increase of overweight and obese individuals in target markets. The change in eating patterns towards high calorie diets due to excessive amounts of solid fats, added sugars, and refined grains, and the increasingly sedentary lifestyles of individuals has steadily increased the number of overweight and obese individuals. Globally, this estimate is 3.0 Bn individuals by 2015.The Center for Disease Control (CDC) has estimated that within the U.S. 69.2% of Americans aged 20 years and over are either overweight or obese. This tailwind for growth is further amplified by Obamacare, which now requires health insurance providers to include screening and counseling for obese individuals.
  • Nevertheless, the commercial weight loss services market faces headwinds. Due to the inconvenient nature of attending meetings, several free weight management apps and wearable activity trackers have flooded the market such as MyFitnessPal (free app) and FitBit (wearable tracker).

Catalyst

Catalysts:

• WTW remains unable to remain relevant in a changing weight management market and is unable to halt the decline of its operating metrics and suffers continued deterioration
• Q1 2015 earnings call on May 5, 2015: WTW management will give indication into first quarter numbers which often set the tone for the remainder of the year (as the first quarter encapsulates the diet season).
• Slower than expected growth in the B2B healthcare initiative
• The debt maturity of the term loan B-1 in 2016 also serves as a catalyst. Should the company lack sufficient cash on hand, revolver, and potential funds from equity raises to pay off the maturity (unlikely), WTW may seek Ch. 11 bankruptcy protection much sooner than expected.
• Foreign exchange headwinds, further depreciating the Euro/USD exchange rate
• Further impairments on Franchise Rights Acquired
• Emergence of a new fad diet (Atkins-like) or FDA approved weight loss drugs (Arena Pharmaceuticals’ Belviq)
• WTW is unable to return to a financial state that can support $2.1 Bn of debt and is unable to refinance its 1st lien term loan B-2 in 2020 leading to bankruptcy
• MyFitnessPal (over 75 million users) was recently acquired by Under Armour for $475m. In addition to its two previous acquisitions, MapMyFitness and Endomondo, Under Armour now has over 120 million active users on its digital platform across the globe. Under Armour’s deeper pockets will be able to further expand MyFitnessPal’s footprint and encroach further into WTW’s market share.

Risks:

• Lower gas prices and improvement in the economy leading to better-than-anticipated results as consumers' discretionary spending increases
• Improved Q1 2015 guidance signaling management turnaround is working
• Widespread adoption of WTW’s B2B offering among managed healthcare plans
• Short interest is currently around 19.5% of shares outstanding and has been as high as 31% recently. This could present the risk of a short squeeze.