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Summary

  • Artal has always been a net seller of Weight Watchers shares since the IPO in 2004 and has never purchased shares on the open market.
  • Artal purchases are said to be in anticipation of equity-based award dilution, but dilution will occur over three years, not immediately.
  • Artal has high insider knowledge so the share purchases on the open market up to another >1% of outstanding shares is material and an indication shares are undervalued.

Mr. Market has continued to be pessimistic with Weight Watchers (NYSE:WTW) because he believes the continued decline of the meetings and online are likely to persist into the future. We have outlined previously (here, here) why we believe that the market is wrong to extrapolate the past into the future and how Weight Watchers' moat is still intact, making the shares undervalued. While we have been a bit early to the party, the controlling shareholder Artal is finally agreeing that the shares are undervalued by purchasing shares on the open market. While the company reports that these purchases are in anticipation for the dilution of the up to 3.5 million equity-based awards from the 2014 Award Plan, we will briefly outline why this is actually a meaningful purchase that reaffirms the company's current undervaluation.

First and foremost, looking at previous holding records of Artal we can see that they have never purchased shares of Weight Watchers on the market before August 2014. Since the IPO, Artal has been a net seller of their holding, largely into share repurchases starting from 64.4 million shares or 60.4% of shares outstanding at that time period, down to 28.75 million or 51% of shares outstanding before the recent purchases. By picking up an additional 1-2% of shares, they have recently purchased almost 1% so far due to daily volume, the company is reaffirming that shares are undervalued.

One might then point out that the shares are only being purchased because of the dilution. That is partially correct, but the dilution is not going to happen any time soon. If Weight Watchers were electing to do an equity raise, which would be an immediate dilution event, then we can see why Artal would increase their holding to retain control regardless of valuation. This is not the case since 3.5 million equity-based shares is an appropriate amount to be given out over the next three years.

(click to enlarge)(Source: Def 14A)

Artal is essentially saying that they know that they will be diluted by up to 3.5 million over the next three years and since shares are so cheap today, they will lock in their ownership control by purchasing now instead of waiting for a lower price later.

Many have rightly criticized Artal's control and capital allocation of Weight Watchers in the past, but the recent share purchases are a clear indication that they, with perfect insider knowledge and control, see shares as undervalued. Since they have insider knowledge it could be likely that they know that the operations are performing better than expected and they will not be able to purchase at these prices for much longer.

Source: Update: Artal Purchases Of Weight Watchers Indication Shares Are Undervalued

Additional disclosure: This article is meant for instructional purposes and not meant as a recommendation to buy or sell. The only kind of intelligent investing is through your own due diligence.