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Weight Watchers Turnaround Still a Heavy Sell

NEW YORK (The Deal) -- Some hedge fund investors still think Weight Watchers International's (WTW - Get Report) turnaround story is a little thin and that the trading range of the weight-loss company's debt in the 70s still represents too much risk for the opportunity.

Maglan Capital LP co-founder and portfolio manager Steven Azarbad, for example, has considered investing in Woodbury, N.Y.-based Weight Watchers but isn't convinced the time is right.

"It's a pretty challenging story," Azarbad said by phone.

Azarbad is wary of the two term loans trading in the secondary market, even at 70 cents on the dollar, because of the company's disappointing results and projections.

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"It's still pretty expensive," he asserted, noting that the debt is trading at 7.5 times Ebitda. "Things will get worse before they get better."

Weight Watchers reported $366.1 million in revenue for the 2013 fourth quarter, ended Dec. 31, an 11% decrease compared to the same quarter in 2012. The company's number of weeks of paid service declined by 8.5% last year. And 2014 will be even worse.

"While we have strong confidence in this team's ability to execute a successful transformation, we knew that 2014 would be a very challenging year," CFO Nicholas Hotchkin said during the Feb. 13 fourth-quarter earnings call.

"It's so hard to model where this thing is going," said Maglan's Azarbad. "We're literally at the first or second inning in the turnaround. You typically want to invest in a turnaround in the fourth or fifth inning."

The effect of competition from phone applications and websites specifically dealing with dieting creates a lot of uncertainty about Weight Watchers' future. Azarbad compared Weight Watchers to retailers adjusting to the "Amazon[.com] effect" and videogame makers dealing with competition from mobile applications.

Another hedge fund source said Weight Watchers is on a campaign to pitch the resilience of its business model, but he is still on the fence.

"The concern is, is it different this time?" the hedgie wondered. "Is there some kind of secular change where people don't want to sit through meetings anymore?"

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