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Why NutriSystem Is Soaring and Tivity Health Is Sinking

By Brian Feroldi - Dec 10, 2018 at 11:51AM

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News of an acquisition sends these two stocks in opposite directions.

What happened

Shares of NutriSystem (NTRI), a company focused on weight loss, are up 28% as of 11:25 a.m. EST, when news broke that it has accepted a buyout offer from Tivity Health (TVTY 0.25%). Traders have knocked down Tivity's stock by more than 33% in response to the announcement.

So what

Here are the must-know terms of the deal.

  • Tivity has agreed to acquire NutriSystem for $1.4 billion, or about $47 per share.
  • The deal will be funded with a combination of cash and stock. NutriSystem's shareholders will receive $38.75 in cash and 0.2141 shares of Tivity Health stock. 
  • The deal represents a 30% premium to NutriSystem's average share price over the last five trading days.
  • Both companies' boards have unanimously approved the transaction.
Businessmen shaking hands and exchanging money

Image source: Getty Images.

As expected, Tivity provided investors with a number of reasons this deal makes sense:

  • Increased scale will create "unique new value proposition for shareholders, health plans, fitness partners, members and consumers."
  • Double-digit accretion to earnings per share is expected in 2020 and beyond.
  • Cost synergies of at least $30 million are expected annually.

Tivity's market cap was about $1.4 billion yesterday, so this represents an enormous transaction for the company. Traders do not appear to share management's confidence about this deal being a good deal for shareholders. 

Now what

After the deal closes, Tivity's net leverage will be about 4.4 times. The company plans on using the profits from the combined business to pay down debt over the next few years. The goal is to reduce net leverage to 3.5 times by the end of 2020 and to just 2.5 times by the end of 2021.

Large acquisitions are notoriously difficult to integrate, so I believe that Wall Street's skepticism makes sense. Tivity's stock might be cheaper today, but I find the huge leverage needed to fund this deal to be worrisome.

For that reason, my plan is to avoid the company's stock for the foreseeable future.

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Stocks Mentioned

Nutrisystem, Inc. Stock Quote
Nutrisystem, Inc.
Tivity Health, Inc. Stock Quote
Tivity Health, Inc.
$32.29 (0.25%) $0.08

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