MANHATTAN (CN) - Weight Watchers misled investors in a "desperate attempt to boost the share price" so its executives could cash out their holdings at inflated prices, shareholders claim in a federal class action.
Lead plaintiff Vlad Kalika sued Weight Watchers International, ex-CEO David Kirchhoff, current CEO James Chambers, and senior executives Ann Sardini and Nicholas Hotchkin. Weight Watcher's controlling shareholder, Artal Group S.A., and its CEO Raymond Debbane also are named as defendants.
Weight Watchers describes itself as the world's leading provider of weight management services, with a global network of company-owned and franchise operations that sell products and services for billions of dollars a year.
Artal Group, a foreign private equity company, bought more than half of Weight Watchers' outstanding common stock from the H.J. Heinz Co. in September 1999.
Artal, a subsidiary of Dutch company Stichting Administratiekantoor Westend, owns about 52 percent of the Weight Watchers outstanding shares, controlling the majority of the voting power. As of January 2013, Weight Watchers had approximately 55 million outstanding shares of common stock, according to the lawsuit.
Debbane, Artal's CEO and director, has been the chairman of Weight Watchers' Board of Directors since the 1999 acquisition.
Kalika, who bought Weight Watchers common stock between Feb. 14, 2012 and Oct. 30, 2013, says Weight Watchers and Artal executives were involved in a massive share buyback scheme to maximize profits for themselves at the expense of other shareholders.
He claims the defendants had access to confidential company information, participated in its management, and drafted and reviewed the statements that misled investors, or at least failed to warn investors about their inaccuracy.
Kalika seeks to represent hundreds of thousands of stock buyers who allegedly were defrauded during the class period.
"On Feb. 14, 2012, Weight Watchers announced results for Q4 2011 and full-year 2011, and provided full-year 2012 earnings guidance," the complaint states. "The company provided a 2012 earnings guidance range of between $4.20 and $4.60 per share. In the same release, Weight Watchers announced that it planned to launch a 'modified Dutch auction' tender offer the following week for up to $720 million of its common stock with a price range between $72 and $83 per share, for a total of 8.78 million shares, and that it separately had agreed to purchase shares held by Artal at the same price paid in the tender offer so that Artal's percentage ownership interest in the company after the tender offer and the share repurchase would be substantially equal to its then-current level of 52 percent.
"If the tender offer was fully subscribed, the company would repurchase a total of approximately $1.5 billion of its common stock collectively through the tender offer and Artal repurchase. The company took on an additional $1.5 billion of debt in order to accomplish this. The program would reduce the total number of outstanding Weight Watchers shares from 74 million to 57 million, a 23 percent reduction. On Feb. 14, 2012, Weight Watchers common stock was trading at $79 per share.
"The tender offer closed on March 22, 2012. Earlier that month, defendants Kirchhoff and Sardini exercised large quantities of options in the $42-53 per share range. On March 16, 2012, they sold large quantities of Weight Watchers shares on the open market for $80-82 per share. On March 22, they also tendered shares to the company for $82 per share. Kirchhoff received gross proceeds on shares sold of approximately $6.5 million and Sardini received gross proceeds on shares sold of approximately $4.4 million. On April 9, 2012, per the terms of the tender offer, Artal Holdings sold 9.5 millions shares at $82 per share, for total proceeds of $779 million.
"Shortly after the tender offer closed, the company reported bad news. On May 2, 2012, the company announced its results for Q1 2012 - the fiscal quarter ending March 31, 2012, just nine days after the tender offer closed - and revised its full-year 2012 earnings guidance that it had previously provided on Feb. 14, 2012. Specifically, the company announced that it expected to earn $4.60 to $4.80 per share for the year, and although this was an increase from its previous forecast of $4.20 to $4.60 per share, the update included a $.50 to $.55 per share benefit from the recently completed tender offer. Thus, without the benefit from the tender offer, the company would have missed its EPS guidance significantly - guiding down to the $4.05 to $4.25 or $4.10 to $4.30 per-share range. Kirchhoff obliquely attributed the disappointing results to 'execution issues.' On this news, Weight Watchers shares plunged 18 percent, from $76.01 to $62.29.
"The defendants would have had visibility into these 'execution issues' during the time they were making the tender offer. Specifically, the officer defendants knew, or were reckless in not knowing, of these negative developments when they sold their shares into the tender offer on March 22, 2012. The Artal defendants knew, or were reckless in not knowing, of these negative developments when they sold Artal's shares on April 9, 2012, after the quarter had already closed.
"On the earnings call after the May 2, 2012 announcement, at least two analysts questioned the timing of the tender offer, suggesting the company could have bought stock back at a lower price after reporting the quarter.
"Timothy Green, a financial writer for the stock blog The Motley Fool, called the company's tender offer 'the most absurd share buyback program I've seen. Loading up the company with debt to repurchase shares at an inflated price is a terrible idea, plain and simple.' On Jan. 11, 2013, Green analyzed Weight Watchers' financial position at the end of 2011, before the massive buyback. He determined the fair value of Weight Watchers stock at the end of 2011, just prior to the share buyback, was $60 per share. '[O]ne thing is clear: $82 per share certainly wasn't cheap.'
"Green explained the harm of the share buyback inflicted on Weight Watchers' shareholders: 'This is what happens when you overpay for your own shares - you hurt the common shareholder. The people who accepted the tender offer for $82 per share made out like bandits, as the [then] current share price is around $60 per share. Those who stayed saw the real value as well as the market value of their shares fall. This reeks of a desperate attempt to boost the share price which in the end did exactly the opposite.'
"Michael Olson, also a financial writer for The Motley Fool, specifically criticized the share buyback as an attempt by Artal to cash out: 'Artal Group, a private equity firm, owns 44 percent of shares, and effectively controls the board. You might argue that last summer's tender offer was a cash-out for its private equity owners, and it wouldn't be unreasonable.'
"The officer defendants and the Artal defendants thus engaged in a 'desperate attempt to boost the share price' of Weight Watchers so they could cash out their own holdings, while at the same time omitting material information from the market that they had a duty to disclose.
"Defendants continued to conceal material information from investors after the May 2, 2012 disclosure of missed earnings. Specifically, defendants failed to disclose to the market that Weight Watchers was losing customers to weight-loss applications ('apps') that were available for free on smartphones, tablets and the Internet." (Brackets in complaint).
Kalika claims ex-CEO Kirchhoff downplayed the toll that competition from free fitness-tracking apps was taking on Weight Watchers' recruiting efforts, and repeatedly dismissed analysts' concerns during earnings conferences.
It was not until Oct. 30, 2013 that Weight Watchers acknowledged "the steep declines in recruitment" caused by a "wave of free apps," Kalika says.
At that point, the company indefinitely suspended the regular dividend it had paid to investors since 2006, which caused the stock price to fall another 19 percent after a steady decline throughout 2013, according to the lawsuit.
Kalika claims Weight Watchers hid its declining income for months and failed to tell investors the company was not on track to achieve the projected financial goals.
He seeks class certification and compensatory damages for securities violations.
Kalika is represented by Samuel Rudman with Robbins Geller Rudman & Dowd of Melville, N.Y.
A spokeswoman for Weight Watchers declined to comment on the lawsuit.