December 10, 2018 / 11:23 AM / a year ago

Shares of Tivity Health drop 30 percent on Nutrisystem deal skepticism

(Reuters) - Shares of Tivity Health Inc (TVTY.O) plummeted over 30 percent on Monday after the company’s deal to buy diet plan developer Nutrisystem Inc NTRI.O in a bid to strike new partnerships with large health insurers was met with skepticism.

The company expects to use Nutrisystem’s diet plans to attract partnerships with large health insurers looking to reduce claim costs from obesity-related health conditions.

Tivity’s Chief Executive Officer Donato Tramuto said the company was in talks with health insurers interested in providing their clients with access to a comprehensive nutrition and exercise program, but did not give any more details.

The fall in shares suggested financial investors were far from convinced.

“Does a Humana or a UnitedHealth need Nutrisystem?” Jefferies analyst David Styblo said.

“There’re a lot of unanswered questions. You’d like to see an announcement by Humana or Aetna, saying ‘hey we want to work with Tivity exclusively for Nutrisystem ... and this is how much we’re going to pay.’”

Tivity estimates about $190 billion is spent every year to treat obesity-related illnesses like diabetes and hypertension. The brunt of those expenses are borne by insurers, including public health plans.

“I felt like we had one foot in cold water and one foot in hot water .... We were not addressing the holistic approach, and that holistic approach is what (health) plans are asking for,” Tramuto said.

Tivity said it expects double-digit accretion to its adjusted earnings per share in 2020 and beyond, and annual cost savings of about $30 million to $35 million.

The proposal of about $47 per share is at a premium of about 37.4 percent to Nutrisystem’s close on Friday.

“While Nutrisystem checks all the boxes ... investors are generally having a hard time understanding how effective this strategic fit is going to be,” Styblo said.

“There was a preference for share repurchases.”

Reporting by Tamara Mathias and Saumya Sibi Joseph in Bengaluru; Editing by Shounak Dasgupta and Sweta Singh

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