What's Wrong With Tivity Health's Nutrisystem Purchase?

It often happens this way in corporate acquisitions: After an announcement, whichever business is getting bought enjoys a stock price bump -- because what company would agree to be taken over if it wasn't getting a premium? -- while the purchaser's shares dip a bit. But this case is both extreme and symmetrical. Shares of fitness and health improvement program provider Tivity Health (NASDAQ: TVTY) plunged by close to 30% -- virtually the same percentage that shares of weight loss player Nutrisystem (NASDAQ: NTRI) gained.

In this MarketFoolery podcast, host Chris Hill and senior analyst Taylor Muckerman consider the possible reasons for investors' disdain.

A full transcript follows the video.

10 stocks we like better than WalmartWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018The author(s) may have a position in any stocks mentioned.

This video was recorded on Dec. 10, 2018.

Chris Hill: Merger Monday once again lives up to its name. Today, it's Tivity Health, which is buying Nutrisystem in a deal valued at about $1.3 billion. We've certainly seen this play out before, in terms of, Company A is acquiring Company B. Company B's stock goes up, A's stock goes down. We're seeing that today. Nutrisystem up about 30%. I've never, however, seen this -- Tivity Health shares are down basically the exact percentage that Nutrisystem's are up. People who aren't Nutrisystem shareholders really seem to hate this deal.

Taylor Muckerman: The first thing that jumped out at me was the fact that Nutrisystem's margins are about half of what Tivity's are. They're acquiring a business that, yes, it does help diversify the business. Tivity appears to be a little bit more on the health and wellness side, whereas Nutrisystem is on the nutrition side of things, and supplying the food that these folks are going to be eating on their diet. That would be the main reason why I could see this deal being frowned upon by Tivity investors -- they're acquiring a business that is smaller, and margins are about half of what they're currently seeing. So, you can maybe see some dilution there as they start to roll this business in.

Hill: It does seem like, once again, the price tag that's being paid is part of what's driving the distaste for this deal.

Muckerman: Yeah, and reasonably so, potentially. I'm not totally familiar with both of these businesses, but anytime you acquire a business that isn't your core competency and has weaker margins, there's probably less room for some synergies there and cost savings. They did say they expect to save $20 billion-$30 billion over the long term in this deal, but in the grand scheme of things, they're still acquiring a business that doesn't make as much dollar-for-dollar as their existing business.

Hill: Better brand recognition than Tivity Health.

Muckerman: [laughs] Definitely. I've never heard of Tivity. I've heard of some of the portfolio companies. But, certainly Nutrisystem is a very well-known brand.

Chris Hill has no position in any of the stocks mentioned. Taylor Muckerman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.