From Insider Score: A hedge fund with an appetite for buyouts has become the largest shareholder of eDiets.com (OTC:DIET), taking a stake in the company through a private placement, and agreeing to buy out its founder.
On May 15th, DIET said that Prides Capital, a Boston and San Francisco-based hedge fund headed by former Blum Capital partner Kevin Richardson, agreed to purchase 1.98M shares at $5.05 from the company. Prides is also receiving five-year warrants to purchase 1.2M shares at $6.00, and the company will get a slot on DIET's board.
Additionally, DIET said that its retiring founder and chairman, David Humble, has agreed to sell 7M shares at $5.05 to Prides. Of those shares, 4.3M are being escrowed pending shareholder approval, while 2.7M shares have already been acquired by Prides, according to Humble's Form 4 filing. The escrowed shares will have price protection under certain circumstances up to $7.50 per share, and Prides will have certain registration rights for all of the shares it's acquiring from the company and Humble.
DIET had 21.88M shares outstanding as of the end of the first quarter. Based on the issuance of the additional 1.98M shares, plus the 7M shares it is acquiring from Humble, Prides owns 9.98M shares of DIET, or a 41.8% stake in the company. If Prides exercises its warrants, the firm's stake would rise to 44.6%.
Prides' investment in DIET is being put to use immediately, as the company announced on Monday that it has signed a definitive agreement to acquire Nutrio.com, a provider of interactive private-label nutrition, fitness, and wellness programs. DIET is paying $8.5M in cash, plus performance-based earnout payments of up to $2.5 million through early 2008, for the company. DIET also announced first-quarter results on Monday, reporting a net loss of -$3.6M, or -16 cents per share, flat compared to a year ago. Revenue rose 6% to $13.77M, boosted by a 31% rise in non-subscription revenues. DIET sells diet plans and other nutritional information through four online properties in the U.S., Germany, and Spain.
Following earnings, DIET shares took a hit when Merriman Curhan Ford analyst Richard Fetyko downgraded the stock from "buy" to "neutral." Fetyko said the drop in the company's subscriber count, from 147K to 205K, combined with a plan to raise ad spending, was his main reason for the downgrade.
"With the change in strategy with respect to the core subscription business, it appears the company will spend the next few quarters getting the core business back on track while it also ramps up FreshCuisine sales and integrates Nutrio.com," the analyst wrote in a research note.
Fetyko lowered his full-year adjusted earnings outlook for DIET to 8 cents per share from 18 cents per share, but upped his revenue estimate from $58.1M to $60.4M. The company, meanwhile, lowered its own EPS estimate from 12 cents to 8 cents.
Worth Noting: Prides Capital "specializes in strategic block, active investing in small- and micro-cap public and private companies. In partnership with its management teams, Prides seeks to create value through strategic, operational and financial assistance," the firm states. Public holdings include a more than 25% stake in Ameritrans Capital (AMTC); 10% or greater stakes in Ark Restaurants (NASDAQ:ARKR), HealthTronics (HTRN), Finlay Enterprises (FNLY), and Waste Services (WSII); and 5% or greater stakes in Trump Entertainment Resorts (TRMP), Diamond Foods (NASDAQ:DMND), and Darling International (NYSE:DAR).
Prides also recently joined with Tudor Investment Corp. to acquire Pegasus Solutions (PEGS), a supplier of travel reservation systems, for $275M, and the firm owns SanuWave, a non-invasive surgical solutions provider for orthopedic conditions. Earlier this week, a Spanish newspaper reported that Prides is in the running to acquire an almost 74% stake in Spanish cement maker Uniland, worth an estimated $1.9B.