GNC attracts Chinese suitors, sources say

Provided exclusively by Mergermarket

GNC (NYSE:GNC), the specialty retailer of vitamins, supplements and nutrition-related products, is drawing early interest from Chinese suitors, sources briefed on the matter said.

The Pittsburgh, Pennsylvania-based company announced in in May that it had mandated Goldman Sachs (NYSE:GS) to explore strategic alternatives including a possible sale. A person familiar with the matter said that the strategic review is broad and no formal auction process has begun, although several potential suitors have contacted GNC.

The May announcement came after GNC lowered its 2016 guidance and shares plunged on the news. The company declined to comment.

Chinese conglomerate Fosun International (HKG:0656) has been in touch with Goldman Sachs and plans to participate in an auction if it launches, a source briefed on the matter said. The move would be in line with the company’s strategy of increasing US exposure and diversifying outside of Europe, the source added.

A second source briefed on the matter told this news service in May that Fosun would like to make one or two large transactions in the healthcare space this year, with the US team actively looking for such targets

Fosun has the liquidity to pursue deals over USD 1bn and is primarily interested in targets with established sales and marketing channels for products that could be introduced to the Chinese market, this source added.

Chinese pharmaceutical company Tasly (SHA:600535) is “very interested” in acquiring GNC but has not yet been in contact with the company, a third source briefed on the matter said. CEO Henry Sun told this news service in January that the company is looking for acquisitions valued at up to USD 500m. GNC has a market cap of USD 1.8bn.

Listed Chinese pharmaceutical giants Shanghai Pharmaceuticals (SHA:601607) and Shanghai First Food Chain Development were looking at GNC earlier in the year, a fourth source briefed on the matter said. However, this source did not know if the two groups planned to participate in a sale process.

Shanghai Pharma is a potential buyer of Australian vitamin company Nature’s Care, with indicative bids due in early August, according to a local press report. The company also reportedly looked at Canadian vitamin producer Jamieson Laboratories. Bloomberg News has reported the Jamieson sale was recently cancelled.

Fosun, Tasly, Shanghai Pharma and Shanghai First Food Chain Development declined to comment.

A sector advisor said that a sale to a Chinese buyer is the most logical outcome of the strategic review because the vitamin market is largely saturated in North America, whereas China is wide open for that segment of specialty retail.

“Whoever gets GNC will be getting it with a plan to roll it out in another market,” the sector advisor said, adding that that the China presents the most headroom.

There is also a strong appetite among Chinese buyers for US health and wellness buys as the country’s middle class grows, this advisor said. Such consumers place a higher value on Western goods rather than locally produced products, he added.

Australian consumer products sell well in China and buyers have sought targets there as well, but the Australian market does not contain enough supply to meet China’s soaring demand, the sector advisor said.

A sector analyst said GNC also remains an attractive takeout target for private equity. The company could likely be acquired for an EBITDA multiple in the high single digits, with some clear potentials for optimization by re-franchising some stores, closing underperformers and cleaning up the company’s capital structure, he added.

In April, GNC agreed to refranchise 84 locations in a sale to Dallas, Texas-based Sun Holdings. The sale was expected to result in a pre-tax gain of USD 17m for GNC, according to a company press release.

Private equity firms, however, are likely to be dissuaded by the increased chance of regulatory scrutiny of vitamin and supplement companies, a second sector advisor said.

There are not clear domestic strategic buyers for the company, the second sector advisor and analyst said. Vitamin Shoppe (NYSE:VSI) has different product lines and customers bases than GNC, they said. Vitamin Shoppe also operates much larger stores than GNC.

Still, a merger of the two retailers has long been speculated upon as current GNC CEO Michael Archbold previously served as COO of VSI, the analyst said, adding that despite their differences, it is possible that manufacturing synergies and savings could be found in optimizing their combined store portfolios.

Both Vitamin Shoppe and GNC are trading at just under 7x TTM EBITDA.

GNC, which has greater than 9,000 locations system wide, posted USD 2.64bn in revenue last year. Same store sales declined in 1Q16.

by Ling Yang in Hong Kong, Jane He in Shanghai, and Nicholas Clayton and Bhavna Kaulin New York, with additional reporting by Yiqin Shen

As seen in the mergermarket newsletter on 13/07/2016

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