Friday, June 09, 2006

What's the matter with GNC

Continuing on a previous theme of LIPOsuction. We present the latest debutante, GNC Corporation.

According the S-1 filed with the SEC GNC is the world's largest global specialty retailer of health and wellness products, including vitamins, minerals, herbal, and specialty supplements. As of March 31, 2006, there were 5,817 GNC locations globally, with 16% of revenues comming from franchised stores. GNC sells alot of diet related supplements. I think every potential buyer ought to understand how GNC intends lose weight before the IPO. Why? because look at how well IPO buyers of Sealy (ZZ) are sleeping.

GNC Weight Loss Plan



  • Series A 12% Cumulative redeemable exchangeable preferred stock: par value of $1000, with a call premium of $1,085.71 as of the IPO date. There are currently 100,000 shares of Series A stock outstanding. Each share is carries $342.18 of dividends in arrears. The total cost to redeem the preferred stock is about $142.7 Million.
  • Restricted payments totaling $49.9 million made on March 2006. The S-1 is unclear about specifics of the payment. But it was paid to the outstanding shareholders, and so is yet another special dividend.
  • A second special dividend of indeterminate amount (i.e the company is not sure how big it is going to be), will be paid to common stockholders of record before the offering.

"GNC Investors, LLC" (the private equity syndicate) spent $733.2 million total (cash equity investment of $277.5Million) to acquire GNC from Numico. In exchange the syndicate got 29,566,666 shares of common stock and in the case of the principal stockholder (Apollo Investment Fund V), 100,000 shares of the Series A preferred stock. The internal rate of return on their investment in GNC is impressive.

GNC Corporation is very leveraged, with $472.8 million of debt supported by $169.7 Million of equity capital. All most all of that pre-IPO equity capital will be removed by LIPOsuction. New investors will contribute all GNC’s post-IPO equity capital, causing them to incur immediate and substantial dilution.

What is really scary is the section of the S-1 labeled "Contractual Obligations" for the next 1-3 years GNC has fixed charges of at least $221.3 Million per year (Combining Leases, Mortgages, and General Corporate obligations). Considering that for the 12 months ended March 31, 2006, GNC generated revenue of $1.4 billion and Adjusted EBITDA of $129.2 million. This does not look good.

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