Blyth's (BTH) stock has been on a wild ride this year, rising from $30 a share all the way to $45, before falling in the past month to just $25 a share. The catalysts for the big drop were the company's announcement on Wednesday that it is withdrawing its initial public offering of its high-growth subsidiary, ViSalus, as well as liquidity concerns from ratings agency Moody's.
For some background, Blyth is primarily a direct to consumer business focused on the direct selling and direct marketing channels. The company designs and markets home fragrance products and decorative accessories, as well as weight management products, nutritional supplements, and energy drinks. The company's products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items, and personalized gifts; nutritional supplements such as meal replacement shakes, vitamins and energy mixes; as well as products for the foodservice trade. The company's products can be found throughout North America, Europe and Australia.
Blyth has three segments with the Direct Selling segment representing the bulk of its value. The other two segments are Catalog & Internet and Wholesale. The Direct Selling segment is divided between ViSalus and the PartyLite brands. The ViSalus brand is focused on weight management products, nutritional supplements, and energy drinks while the PartyLite brand specializes in candles, candle-related accessories, other fragrance related products as well as gourmet foods. For the six months ended June 30, 2012, the Direct Selling segment was responsible for about 85% of the company's sales.
Although PartyLite and the other two of the Blyth's segments have been struggling, ViSalus has been a strong performer and that is seen in the figures. ViSalus had net sales of $327.3 million for the six months ended June 30, 2012 and $230.2 million for the year ended December 31, 2011, increases of approximately 450% and 600%, respectively, as compared to net sales of $59.3 million and $33.7 million for the comparable prior year periods.
The growth in ViSalus has been driven by the popularity of the company's Body by Vi 90-Day Challenge products. The Challenge is a platform that focuses on helping its customers achieve their health and fitness goals over a 90-day period. The products included in the plan include its popular ViSalus shakes, which cost $1.87 a piece as a meal replacement. Data on the number of people that have joined the challenge can be found with a simple Google search with the most extensive data set I found showing strong m/m growth. A call was placed to the company's representatives for further data, but they told me that they stopped disclosing the data after April.
ViSalus' business model can be described as a hybrid direct-to-consumer and traditional networking business model. The company holds meetings and uses social media extensively to connect with its customers and distributors. The costs are minimal to join ViSalus as a promoter. The only requirements are a $49 enrollment fee with no requirement to purchase its products. Furthermore, ViSales has various rewards setup that incentivizes new promoters as well as promoters that have been with the company for a long period of time.
The tailwinds are in place for ViSalus, as domestically and in Europe, the trend of obesity is rising. Expansion into other geographic areas can also play a big role in accelerating earnings growth of the subsidiary.
The drop in the stock price has been driven by the IPO news as well as Moody's review of Blyth's ratings. On September 20, Moody's changed the rating outlook to negative from stable on Blyth. The outlook change reflect the company's constrained liquidity profile in 2013, continued weakness in its core direct selling candle and home fragrance business, as well as uncertainty stemming from the recent announcement that it filed a registration statement for a potential initial public offering of ViSalus, the weight management product business in which the company currently holds a 73% stake. The outlook also reflects the growing reliance upon its ViSalus weight management products business and the heightened risk profile associated with its business model and the weight management product category generally in comparison to candles and fragrance products.
Moody's further noted that Blyth's liquidity in 2013 will be constrained by both the November 2013 maturity of its $100 million senior unsecured notes and the potential purchase obligation related to ViSalus. Blyth is required to purchase the remaining 27% stake of that business for approximately $271 million if that operation meets certain performance hurdles. As of June 30, 2012, Blyth publicly stated that it anticipates the operating target requiring the additional purchase to be met. At this time, it is unclear how Blyth will fund these upcoming obligations, as cash on hand is not sufficient.
As noted by Moody's, the liquidity issues stems from its $100 million in debt due in November 2013 as well as the purchase of the remaining 27% stake in ViSalus. Blyth signed an agreement to purchase ViSalus in August of 2008 with the acquisition done in four parts. In the first stage, Blyth purchased 40% of the company for $13 million. The second, third, and fourth were scheduled to be done on a multiple of 8x ViSalus' EBITDA at the time of the closes. The second and third closes were already completed and the company now owns 72.7% of the stock outstanding and the fourth close is scheduled for 2013 with the company, at the end of Q2, suggesting that the company will have to pay $271 million for the remaining chunk of ViSalus. With just net cash on hand of $107 million, that is a problem.
However bleak 2013 looks at this point, the agreement does provide a key nugget of information. At a multiple of 8x EBITDA, the 27% stake equates to a full valuation of ViSalus of $1 billion and a projected FY12 EBITDA for ViSalus of $125 million. ($271 million for a 27% stake is about $1 billion for a 100% stake. $1 billion divided by 8x EBITDA multiple suggests a forecasted EBITDA of $125 million).
Note, the withdrawal of the IPO seems to be consistent with recent IPO events. Of the five new issues to begin trading last Thursday, only one, real-estate listing company Trulia (TRLA), delivered a post-IPO punch. Two other offers slated to list Friday hit snags, with Smith Electric Vehicles shelving its plans to go public after it couldn't secure an attractive deal and the other offering moving to this week.
Although the company didn't disclose much on its conference call, the company has still a multitude of options on the table to figure out how to close the gap between the cash on hand and cash needed for 2013 obligations. Although this is a worry, the withdrawal of the IPO and the increase of the dividend suggest to me that management has enough options on the table that it feels that it will comfortably meet or negotiate around its 2013 obligations. A management team in desperate need of cash would have pushed through the IPO regardless of the market conditions.
Blyth's purchase price of ViSalus at the 8x EBITDA multiple is in the range with other publicly traded multi-level market business models. Herbalife (HLF) is currently trading at an EV/EBITDA multiple of 7.6. Tupperware (TUP) is trading at an EV/EBITDA multiple of 8.2. Nu Skin (NUS) is trading at a multiple of 5.9. Avon (AVP) is trading at a multiple of 8.6. Usana Health Sciences (USNA) is trading at a multiple of 6.3. Note, although the multiples are within range, the growth rates are very different, as for example, Herbalife is expected to grow revenues at 16% this year versus a much higher figure for ViSalus.
The private market suggests similar multiples. The most recent M&A news in the direct to consumer space was the Avon/Coty deal. Coty offered $10.7 billion or $24.75/share in the AVP takeover offer that included backing by Warren Buffett. That deal was offered at around 10x EBITDA.
Blyth had 17.2 million shares outstanding as of June 30 for a market cap of $427 million. Blyth had net cash on the books of $107 million for an enterprise value of $320 million. With an expected $125 million EBITDA from ViSalus, the company's 73% stake is worth about $730 million on an 8x EBITDA multiple. The rest of the company's businesses have struggled this year and have produced an operating loss of $4 million in the first six months of this year, according to my estimates. They have been in decline, but if they company is able to turn them around then that could bring some additional value. In the current depressed state, I estimate that Blyth expects them to report EBITDA of about $23 million for FY12 (I reverse engineer the income statement using the fact that Blyth expects EBITDA of $125 million from ViSalus for FY12 and the fact that it expects normalized EPS of $3.00-3.15 for FY12). Using a depressed 4x EBITDA multiple, this provides an additional $100 million of value for an enterprise value of $830 million for the current Blyth. Adding in the net cash, I arrive at a per share price of just over $54 a share for BTH.
Blyth has a strong record of shareholder-friendly actions and has a history of regular and special dividends as well as share repurchases. The company paid a 7.5 cents a share dividend earlier this year and a 10 cents a share dividend is due later this fall. The former is a dividend bump of 50% y/y while the latter is a 100% jump y/y. In 2011, Blyth paid a special dividend of $0.75 a share and two additional semi-annual dividends of 5 cents a share. In 2010, Blyth paid two special dividends of 50 cents a share and two additional semi-annual dividends of 5 cents a share. Even in 2009, in the depths of the economic recession, the company paid its two semi-annual dividends of 5 cents a share. All the figures here are split adjusted. Blyth also spent a combined $27 million for share repurchases in the 2009-2011 time period.
Management's and shareholders' interests are in alignment here, with the CEO's family holding nearly 40% of the stock. The holdings were given a significant boost last summer after the CEO, Robert Goergen, purchased 800,000 split-adjusted shares for a price of $26.15 for nearly $21 million. Note, the stock is now trading below his purchase price. Further, following the drop in the stock yesterday, two Directors made purchases of the stock at prices of about $26/share showing their confidence in the company.
Earnings momentum in 2012 has been strong for the company, to say the least. Originally EPS split-adjusted guidance of $2.50-2.745 has been raised after each quarterly report so far and now stands at $3.00-3.15 for a P/E multiple of just about 8. Free cash flow was originally estimated to be $57 million and now stands at $65 million.
Catalysts include further earnings acceleration at ViSalus, monetization of the ViSalus subsidiary, as well as any actions the company takes to coming closer to a 2013 liquidity situation solution.
Risks include a slowdown in ViSalus and a failure to come to a 2013 liquidity situation solution.