Special Situation: WeightWatchers Bankruptcy - Part 1
The Big Picture
WeightWatchers (WW International) is currently going through a bankruptcy process, and it might be an interesting opportunity to make money. But you may need to act quickly—this restructuring could be wrapped up in just a week or two.
I’m still early in my analysis, and some of my assumptions might turn out to be wrong. But because of the tight deadline, I wanted to share what I’ve found so far—so you can dig deeper if this kind of situation interests you.
Before diving in, I highly recommend reading my article on special situations, which is based on Joel Greenblatt’s classic You Can Be a Stock Market Genius. It lays out the framework I’m using here:
Why Bankruptcies Can Be Profitable
Most companies that go bankrupt deserve it. But sometimes a solid business is pushed into bankruptcy by excessive debt—often debt that isn’t even tied to the core operations. That’s especially common in the aftermath of private equity transactions. (They used to be called “leveraged buyouts,” which is a much more honest term. After all, who would suspect that something called a “private equity deal” could end in bankruptcy due to debt?)
In these cases, the business typically continues operating normally during bankruptcy. The process is mainly about restructuring the balance sheet: equity holders are wiped out, debt is cancelled, and the lenders become the new owners of a now debt-free company.
Joel Greenblatt points out that investing during bankruptcy is usually a bad idea. The process is messy, and if you own the common stock, there’s a good chance you’ll end up with nothing.
But once the company emerges from bankruptcy—stronger and cleaner—things get interesting. The new shareholders (the former lenders) often have no interest in holding the stock. Many are not even allowed to—because they specialize in debt, not equity. That forced selling can push the share price well below intrinsic value.
The WeightWatchers Opportunity
Yes, the business has declined sharply—largely due to pressure from GLP-1 medications. Management reacted poorly and made several mistakes. But even in this challenging environment, WeightWatchers still serves about 3.4 million subscribers and generates over $750 million in annual subscription revenue—with a 70% gross margin. That’s clearly not a terrible business.
Thanks to better management and aggressive cost-cutting over the past few months, the company seems to have stabilized its normalized EBIT at around $100 million per year (calculated as EBITDA plus goodwill impairment minus CapEx).
I still need to do more valuation work, but if that EBIT figure holds up, the enterprise value could be around $1 billion.
Here’s the problem: WeightWatchers has $1.6 billion in debt, which means the equity is deep in the red. Interest payments alone exceed $100 million annually—effectively crushing the business.
A bankruptcy restructuring seems inevitable, simply to get a clean slate.
Terms of the Restructuring
WeightWatchers filed for Chapter 11 on May 6, and here are the key terms of the proposed restructuring:
The entire $1.6 billion in existing debt and all existing equity will be canceled.
The lenders will receive:
$465 million in new notes (due in five years) paying 7.50% interest, and
91% of the new equity.
The existing shareholders will receive just 9% of the new equity, meaning they’re effectively diluted by 91%.
The new capital structure reduces total debt to $465 million. So if my estimate of normalized EBIT at $100 million proves accurate and the enterprise value is around $1 billion, then the equity would be worth about $500 million.
We have three options:
1. Buy the equity now at $0.28 per share.
That implies a market cap of about $22 million. After the 91% dilution from the restructuring plan, our share shrinks to just 9% of the equity—so the implied post-bankruptcy equity value is closer to $250 million. That’s still only half of what I believe the business might be worth.
2. Buy the debt, which trades at 30 cents on the dollar.
This allows us to purchase $1.6 billion of existing debt for $480 million. In the restructuring, lenders receive $465 million in new 5-year notes (at 7.5% interest) and 91% of the equity. So in effect, we’re buying the equity for free—if the debt is money-good.
However, the new notes will be privately placed and not publicly traded. We can’t assume a liquid secondary market exists—so we may have to hold the debt until maturity.
That makes the debt less attractive. Let’s assume we do hold it to maturity. Over five years, we’d receive:
$465 million principal
$35 million in annual interest × 5 = $175 million
Total: $640 million
But my hurdle rate for investments is a return of 15% per year. To hit a 15% IRR, I could only pay $320 million today for that stream of payments. But we’re paying $480 million, which means we're effectively paying $160 million for the equity. That’s still a good deal if my $500 million equity estimate holds—but we’re locked in for five years.
3. Follow Greenblatt’s approach: wait.
Let the bankruptcy process play out. Once the new equity is distributed, many of the new shareholders (former debt holders) may want to exit quickly. That could create temporary selling pressure and mispricing.
My preferred option is to invest a smaller amount in the debt now and see how things develop as the company emerges from bankruptcy. If the new equity ends up trading at depressed prices—due to selling pressure from former debt holders—I might buy more stock at that point.
Of course, all of this hinges on one key assumption: that normalized EBIT is actually close to $100 million. If that doesn’t hold up, the entire thesis falls apart. I’ll need to do more work to verify that number.
Risks
Here are the risks that are already obvious to me—more may emerge as I dig deeper. If you spot anything I’ve missed, please let me know.
The company might fail. Revenue could continue to decline, while fixed overhead remains unchanged. This would rapidly erode profits and cash flow. If the company can't meet its interest obligations, both the new debt and equity could become worthless—and I’d lose 100% of my investment.
Long feedback loop. I won’t know for another five years whether the company will be able to repay the principal on the new debt.
Equity holders face conditions. If you’re considering buying the current equity, be aware: you’ll only receive 9% of the new equity if certain milestones are met during bankruptcy. If they aren’t, you get nothing. I haven’t analyzed these conditions in detail because I’m currently only considering the debt.
I don’t yet know enough to make a final decision—but I clearly see the potential for an attractive return over a relatively short time horizon. So I’ll continue the work.
In part two I will do a valuation of the company.
Let me know if you have any question!