GNC Corp. IPO Likely to be an Unhealthy Investment (GNC)

| About: GNC Holdings, (GNC)

Continuing on our previous theme of LIPOsuction, we present the latest debutante, GNC Corporation (NYSE:GNC).

According to 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 coming 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? For starters, look at how well IPO buyers of Sealy (ZZ) are sleeping.

GNC's Pre-IPO 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 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 an indeterminate amount (i.e., the company is unsure about the amount themselves), 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. Almost all of that pre-IPO equity capital will be removed by LIPOsuction (LIPO=Leveraged IPO). New investors will contribute all of GNC’s post-IPO equity capital, causing them to incur an immediate and substantial dilution in value.

What is really scary is the section of the S-1 labeled "Contractual Obligations" for the next one to three 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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