Weight Watchers International ($WW): A Creditor's Take on a Distressed Situation
The Art and Science Behind WW's Potential LME Actions
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Situation Overview:
WW International, Inc. (“WW”), formerly known as Weight Watchers, is a global provider of weight loss and wellness services. Founded in 1963, WW offers a subscription-based program combining in-person workshops, digital tools, and food products to help members achieve their weight loss goals. The company’s primary sources of revenue are subscriptions to its Digital and Workshop + Digital offerings, which represented 92% of sales in 2023. As of December 31, 2023, the company had 3.8 million subscribers.
Digital Pivot Difficulties
While the company is one of the most recognizable brands in the industry, WW has faced challenges in recent years adapting its business model to changing consumer preferences and an increasingly competitive landscape. After experiencing temporary tailwinds from the COVID-19 pandemic, WW has had trouble retaining subscribers and driving new customer acquisitions.
The company has made some efforts to modernize its brand and offerings, but has struggled to drive growth and profitability. In 2023, revenues declined 15% y/y to $890 million, 35% below its 2020 levels. While WW has seen some success in extending subscription durations, this has come at the expense of lower average revenue per user. Adj. EBITDA margins have also contracted significantly from historical levels in the 20-25% range to just 16% in 2023.
GLP-1 Telehealth Acquisition
Recognizing the need to pivot its business model, WW made a bold acquisition of telehealth platform Sequence in April 2023 for $132 million ($106 million net of cash acquired). Sequence connects users with doctors who specialize in weight management and prescribe popular GLP-1 medications. Management hopes that Sequence will enhance WW’s value proposition and position it to capture share of the rapidly growing obesity drug market.
The stock reaction to the announcement was quite favorable, jumping nearly 60% the following day and rallying over 3x throughout the year on the backs of positive sentiment surrounding GLP-1s.
However, the Sequence business faced some challenges in 2023 related to constrained supply of GLP-1 medications as well as insurance coverage hurdles. This forced WW to lower its full-year 2023 revenue guidance for Sequence to $30 million from $45 million originally. Despite the positive developments in the space, the clinical weight loss market faces many uncertainties around patient access/affordability and medication adherence. Moreover, there remain lingering questions regarding the longer-term value proposition of players like WW and Sequence.
Overlevered Balance Sheet
From a capital structure perspective, WW ended 2023 with $1.4 billion of funded debt, implying gross leverage of 9.9x, based on 2023 Adj. EBITDA of $146 million. The current capital structure comprises a $945 million First Lien Term Loan due 2028 and $500 million of Senior Secured Notes due 2029. While the company does not face any near-term maturities, its uncertain business prospects, thin FCF profile, and elevated leverage levels has weighed negatively on its bond/loans. As shown below, the company’s Senior Secured Notes due 2029 last traded in the high 30s context, implying a yield to maturity of 29%.
The Path Forward
Looking ahead, WW has outlined a turnaround strategy focused on driving subscriber growth and engagement in its core offerings, scaling the Sequence platform, expanding B2B partnerships, and cutting costs. However, guidance for 2024 implies further topline pressure with revenue expected to decline 3-7% organically and Adj. EBITDA margins still below historical levels at 17-19%.
There are also growing concerns that WW could seek to address its over-levered capital structure through liability management exercises (“LME”) such as debt exchanges and/or structurally-senior debt financings. The company’s credit agreements provide significant flexibility to transfer value away from existing creditors through unrestricted subsidiary transfers, incremental debt issuances, and permitted investments with loose limitations.
With its secured debt trading at highly distressed levels and the specter of possible LMEs on the horizon, creditors are understandably wary of the company’s ability to navigate its current challenges without impairing recovery values. Much will depend on management’s ability to drive a turnaround in the core WW brand while also scaling newer growth initiatives like Sequence—a seemingly tall order in an evolving and competitive industry landscape.
On April 8, 2024, Bloomberg announced that lenders had signed a cooperation agreement that would bind lenders to act together in negotiations. In the following section, I will review the company’s credit documents, opine on the flexibility the company has to pursue LME actions, detail what that means for existing holders, and provide my views on how to play the capital structure, if at all.
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