GNC Looks to Continue Success Among Private Equity-Backed IPOs

| About: GNC Holdings, (GNC)
Private equity-backed companies are lining up to go public in 2011, after a tough market environment for such companies in 2010. Four of the largest IPOs in the first quarter of 2011 have been private equity backed deals, including HCA Holdings Inc. (NYSE:HCA), Kinder Morgan Inc. (NYSE:KMI), Nielson Holdings (NYSE:NLSN) and American Asset Trust (NYSE:AAT). Combined these companies have raised approximately $8.85 billion. All four companies were met with strong investor demand, with first day gains between 3.4% and 8.7%.
GNC Holdings Inc. (NYSE:GNC) looks to continue this trend with its IPO debut on Friday.
GNC looks to raise approximately $360M, based on the midpoint of the offering of 22.5 million shares at $15.00 to $17.00. Of the 22.5M shares offered, GNC is selling 16M shares and the selling stockholders are selling 6.5M shares. At the midpoint of the range, GNC will have a market capitalization of approximately $1.66B. The offering is being led by Goldman, JP Morgan, Deutsche Bank and Morgan Stanley.
The company was acquired in 2003 by private Equity firm Apollo for $750M. Apollo subsequently sold GNC in 2007 to private investment groups Ares Management and Ontario Teachers Pension Plan for a total Enterprise value of $1.65B. Ares and Ontario Teachers are selling approximately 5.4M of the 6.5M secondary shares in this offering and post offering they will collectively own approximately 54.8M shares or 63% of the outstanding Class A common stock.
GNC is a specialty retailer of health and wellness products, including vitamins, minerals and herbal supplements products, sports nutrition products and diet products. The company has a global presence with more than 7,200 locations as well as the website, in which they focus on premium, high margin nutritional products sold under GNC proprietary brands and nationally recognized third party brands.
The company has a total store count of 5,654 in the U.S. and 1,606 international franchised locations. Of the 5,654 U.S., 2,748 are company owned stores, 900 are franchised (which the company describes these as more of an annuity business), and the remainder (or 2,003) are stores within stores of Rite Aid (NYSE:RAD). The company believes it has a potential for an additional 1,000-1,200 new stores in the U.S. and plans on 100 new stores per year in the U.S. for the foreseeable future. It is also under contractual commitments for an additional 100 franchised international stores per year.
GNC has executed a series of strategic initiatives since 2006 to enhance the existing business and growth. These initiatives include: Key upgrades in senior management, modernizing the GNC brand image, Increasing revenue from new and successful GNC branded product launches, redesigning the online business in 2009, upgrading point of sale systems, and launching new partnership programs to leverage the GNC brand strength. The result of these initiatives has provided the company with 22 consecutive quarters of same store sales growth.
GNC has grown revenue at a 6.7% CAGR from 2005 to 2010 from $1.32B to $1.82B. Adjusted EBITDA grew at a 19.3% CAGR over the same period, from $110M to $265M. At the same time the company has been able to decrease leverage over the last four years from 6.1x in January 2007 to 3.3x at the end of 2010 (and they expect to be at 3.2x pro forma with the offering).
The primary competitors are Vitamin Shoppe (NYSE:VSI) and Vitamin World, though GNC is much larger (based on store count) with 2,748 company owned domestic stores to less than 500 for each of the other two. Though VSI had a higher growth rate than GNC in 2010 (11% versus 6.7%), GNC has higher EBITDA margins than VSI, and at the current range it appears that GNC is at an attractive discount to its public peer.
While private equity firm Apollo Global Management (NYSE:APO) had a poor performance with an IPO debut on Wednesday (despite pricing at the top of the range with what was described as strong demand), so far in 2011 private equity backed deals have been the story with solid IPO debuts (though KMI is currently below its offering price as of Wednesday’s close, down 1%). GNC has twice before unsuccessfully tried to float an IPO, back in 2003 and 2006, but now looks like it may be just the time for the company to ride the wave of recent success.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GNC over the next 72 hours.

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