Tivity Devours Nutrisystem: Healthy for Investors?
Tivity Health (NSDQ: TVTY) discovered the hard way how to lose weight, as measured by market cap.
When the provider of health and fitness programs announced its intention to purchase diet food purveyor Nutrisystem (NSDQ: NTRI) for $1.3 billion, TVTY stock went on a quick and dangerous diet, trimming the company’s valuation by 30%.
It can be typical for the stock of the purchasing company in a significant deal to wilt a bit, but this move is much more dramatic.
To hear the companies tell it, the story behind the merger makes perfect sense. In their words:
“With the addition of Nutrisystem, Tivity Health will deliver a unique ‘calories in and calories out’ solution.”
Management goes on to propose the typical “synergistic” talking points that populate the slide deck of most stock deals:
The “combination and increased scale will create a unique new value proposition for shareholders, health plans, fitness partners, members and consumers — supporting healthier lifestyles and lowering medical costs.”
Tivity contracts with over 16,000 fitness clubs to provide services to customers insured by various Medicare health insurance programs. Medicare insurers Humana (NYSE: HUM) and United Healthcare (NYSE: UNH) accounted for almost 40% of Tivity’s revenue last year.
While Nutrisystem’s goal, helping humans get fit, aligns with Tivity’s, its route and method are entirely different. Tivity, of course, focuses on the “calories out” portion of the health equation via its fitness options. Nutrisystem’s attention goes to the “calories in” portion.
That’s where the overlap ends. In theory, these two companies should be able to work together but wildly divergent business models make a smooth transition unlikely.
Tivity’s customers are large, corporate insurance companies. As noted above, two large customers comprise a significant portion of its revenue. Keeping two customers happy requires some work but does not include a massive sales force to sell or maintain this service.
Tivity is basically a broker for fitness club memberships. It’s a great business with 23% profit margins and robust cash flow. After all, it requires very little capital outlay because it’s reselling a service.
Nutrisystem provides low-calorie foods to customers. Its weight loss kits typically include a full menu of pre-packaged meals for a certain period. A typical package is a 5-day program promising 7 pounds of weight loss in two weeks.
While Nutrisystem avoids the capital cost of manufacturing plants by outsourcing food production to a third party, its advertising and selling costs are enormous. In fact, Nutrisystem spends 40% of its revenue on selling expense versus just 6% by Tivity.
Tivity’s customers are loyal, typically sticking around for years and allowing data to accumulate to prove how well the service works at keeping its seniors healthy.
Nutrisystem’s customers are fickle and generally short-lived. It must continuously refresh its customer list to keep revenue growing. And while someone might choose working out as a permanent lifestyle change, it is highly unlikely one would wish to incorporate Nutrisystem foods into their daily diet.
Most unpalatable for investors is the fat price paid for Nutrisystem. Before the melting of its stock price, Tivity sold for a multiple of 12 times profits (EBITDA used as this profit measure). It offered 16 times that same measure for Nutrisystem.
And that premium paid can’t be explained by growth, as it often is. Tivity is growing profits faster than Nutrisystem, which saw profits fall 13% in the first nine months of the year. I can see how inedible this deal is for holders of Tivity stock.
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