No one ever said Oprah Winfrey didn't have a good head for business. Now we'll find out if she can do for a weight-loss program what she did for book sales.
Wall Street is buzzing Monday about the talk-show-host-turned-impresario's purchase of a 10% stake inWeight Watchers International (WTW) - Get Report , where the 61-year old Winfrey is taking a seat on the board.
But the remarkable thing is how cheaply Winfrey got her stake in the New York-based company, paying about twice Weight Watchers' per-share cash flow. The company threw off $231.9 million worth of cash last year -- down sharply from 2013 -- and Oprah's purchase valued Weight Watchers at about $432 million (plus debt -- more on that soon). Even after the stock's pop on Monday, the valuation is a modest 10 times this year's expected earnings and less than three times earnings before interest, taxes, depreciation and amortization.
The company needs two big things: to reduce its $2 billion debt load and to buck up revenue, which has dipped about 19% since a peak in 2012, to $1.48 billion last year and an expected $1.16 billion this year.
If there's one thing Oprah knows, it's marketing. Weight Watchers' history is that it does best when it has a pitchwoman, most recently the singer Jennifer Hudson, that women relate to easily. Even with her $3 billion net worth, Winfrey has that skill -- and has been able to identify it in everything from authors like Wild's Cheryl Strayed to Dr. Phil and Dr. Oz, each of whom owes their entertainment career to having been spotted early by Oprah. In bringing Oprah into the fold, Weight Watchers has picked someone well matched to the job at hand.
The debt is a tougher nut to crack, but the company has already been making progress.
Weight Watchers pays about $120 million to $130 million a year in interest, which in some quarters is more than its EBITDA. The numbers say that Weight Watchers makes its money when it can control its marketing spending -- its skinny earnings quarters turn up in the winter, when ad spending ticks up to attract New Year's resolution makers.
Ideally, the debt would come down to about $1.2 billion to $1.5 billion. The smaller number is less than four times last year's EBITDA; the higher one is less than four times what Weight Watchers earned before interest, taxes and non-cash charges in 2013, the last full year of Hudson's relationship with the company. That's a pretty comfortable debt load, especially at today's interest rates.
Recent history strongly suggests the company can shed that excess fat fairly easily. The company has reduced its long-term debt by roughly $300 million already this year. And it spends almost nothing on product development, so the cash isn't needed for research and development.
Which level of debt best fits Weight Watchers depends on how quickly it can turn Oprah loose to find the next Jennifer Hudson -- or she herself may become the next on-air face of the company. The deal also lets Winfrey use the Weight Watchers brand to promote her other businesses, so new customers could come in through those channels.
The company is mature, and has always dealt with a lot of competition. But the turnaround at Weight Watchers, to be enough to justify today's surge in the stock, doesn't require much more than getting revenue back to where it was a few years ago. Reducing its debt will do the rest of the job, and if Winfrey's presence helps the company spend its marketing budget more efficiently that will provide some growth.
To put it in terms that suit Weight Watchers' mission, its turnaround should be easier than shedding that spare tire.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.