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Engaged in Talks With PE to Buy Medifast

By Ronald Orol

Engaged Capital LLC’s Glenn Welling is in talks with multiple private equity sponsors about potentially working together to bid to buy nutritional and weight loss supplements maker Medifast Inc. (MED), a source said.

If Welling does participate in making a bid, it would be the first time he has ever sought to make an unsolicited offer. The effort emerges after Engaged in November reported accumulating a nearly 15% stake in Medifast in a securities filing, saying he planned to have talks with management on matters including board composition and a potential sale. The Baltimore company has seen its share price fall precipitously this year, thought the stock shot up 8.7% to $103.16 a share following an initial report on a potential deal.

According to sources, Welling is also in discussions with bulge-bracket banks about providing financing for such as bid. Medifast has a $1.2 billion market capitalization.

Welling likely has a strong understanding of the business, its CEO and whether private equity bidders could be interested considering that he held a position on the board between 2015 and 2018. In April 2015, Engaged settled with Medifast, with the target adding five new directors, including Welling and Brown Equity Partners LLC chief executive Jeffrey Brown.

Brown, still on the board as lead independent director, likely was chosen by Welling. According to relationship mapping service BoardEx, a sister company of The Deal, Brown and Welling are also connected through Rent-A-Center Inc. (RCII). Welling obtained three seats on the rent-to-own retailer’s board in 2017, including a position for Brown, in a contest that went the distance.

In addition, shortly after Welling’s settlement, in 2016, Medifast replaced its CEO with direct-selling industry veteran Daniel Chard. He was chosen by a CEO search subcommittee made up of the then-CEO, Michael MacDonald, and Welling.

Thomas Ball, founder of Vanderbilt Consulting, said Welling may be comfortable both partnering with a PE firm to buy Medifast or having it acquired by another firm.

“If their bid goes through at the right price, they are happy, and if someone outbids them, Welling is a winner there too,” Ball said. “It is possible that a white knight comes along to bid more.”

Bruce Goldfarb, co-founder of proxy solicitor Okapi Partners LLC, said that Welling might be satisfied if another white knight emerged to acquire Medifast at a premium to his stake in the company. Nevertheless, Goldfarb added it’s also very possible that Welling’s real goal is to partner with a private equity firm to acquire Medifast.

“There is convergence emerging between activists and private equity firms,” Goldfarb said. “It is possible that an activist like Engaged, who is willing to take large stakes in small companies, could want to partner with a private equity firm to buy Medifast, when there might not be another alternative out there to realize value.”

In addition, Goldfarb noted that Welling, who had previously been employed as a banker at Credit Suisse, might be trying to merge his financial and operational skillsets with this possible acquisition. Goldfarb said Medifast’s board appears to comprise people who are likely comfortable with Welling. “I would expect with his history with Medifast that he would know the company well,” Goldfarb said.

Nevertheless, if Welling decided to launch a bid with a PE firm to buy Medifast, he would have to be careful to prove he is a solid partner.

“You have to be a solid partner, and the PE firm has to believe you are not going to play them,” Goldfarb said. “If a PE firm wants to partner with Welling, they will do a lot of research and will want to close the transaction,” he added. “If they get deal jumped, they don’t get the upside of the deal like Welling does. In that scenario Welling could find himself losing a PE friend.”

In addition, Welling has to be sure that his own investors at Engaged are comfortable with an acquisition, since the company will typically be held for much longer than the fund’s other minority positions. It is possible Welling has set up a side-pocket fund to make the bid and investment, Goldfarb said. “It is a different kind of investment profile,” he said. “It goes back to the issue of his investor relations program and what kind of investment horizon his investors have.”

Linda Bolton Weiser of D.A. Davidson & Co., meanwhile, pointed to Medifast’s recently installation of an anti-takeover poison pill, which indicates the company may be seeking to prevent Engaged from accumulating more shares or preventing an unsolicited bid.

She added Medifast has a lot of free cash flow, which suggests a private equity bidder could be interested. She said, however, earnings could turn negative, which would discourage PE buyers. In addition, Weiser said an acquisition by a strategic buyer would be extremely unlikely because companies outside of Medifast’s direct-selling specialization are uncomfortable with the business strategy.

Nevertheless, it is possible if no auction process emerged that Welling would nominate directors once again. The deadline for nominating directors at the weight loss products company is in mid-March for a meeting expected to take place in June.

—Greg Morcroft contributed to this report