PETITION

GNC Buys Itself Some Time

GNC Holdings Inc. ($GNC) reported earnings recently and, to the chagrin of distressed folks who probably hoped it would be a bigger, messier bankruptcy filing than Vitamin World, the company doesn't look slated for bankruptcy court after all. At least not in the short term. The company reported EPS up $0.18 YOY on a $12.2mm drop in consolidated revenue (weighed down primarily by wholesale). Margins increased by nearly 2% - mostly on account of cost cutting initiatives (which include the closure of 90 locations in 2017). The company reported $196.7mm of free cash flow. That's more than Netflix!

The company is using its cash to pay down its revolver and, as of 12/31/17, had no borrowings outstanding. The company also looks close to an amend and extend of its term loan for two years to 2021 - as of Valentine's Day, the company had garnered the support of nearly 50% of its term lenders. Net debt to EBITDA is 4.6x. The company expects to see a short-term hit on account of the tax reform (limitations on net interest and expensing of capital investments) but a long term benefit.

Interestingly, GNC's brand demonstrated that it still retains some value - even if that value isn't what it once was. CITIC Capital, a Chinese investment fund and controlling shareholder of Harbin Pharmaceutical Group, will inject a $300mm cash infusion in the form of a convertible perpetual preferred security with a 6.5% coupon (cash or PIK) at a $5.35 conversion price. As-converted, this represents roughly 40% of GNC’s outstanding equity. It will also take 5 board seats. The deal is contingent upon the amend-and-extend and a refi of the current revolver.

But wait. There's more. GNC will also form a JV in China whereby it will drop its current China business into the JV for a 35% interest and $22mm cash payment; it will recognize wholesale sales and receive annual royalty fees, including a $10mm advance on annual royalties. Clearly GNC needed some liquidity now. And clearly this is a branding deal: GNC's brand will be slapped onto Harbin Pharmaceutical Group's product.

We suppose its a good idea to generate value out of your IP BEFORE filing for bankruptcy rather than after. S&P Credit Ratings seemed to think so: it issued an upgrade. While this likely means GNC will stay out of bankruptcy (for now), these transactions, in total, do reflect stress in the franchise. We'll have to keep a close eye on it to see where it goes from here.