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GNC: The Joint Venture

Dec. 03, 2018 4:13 AM ETGNC Holdings, Inc. (GNC)51 Comments
Carlton Getz, CFA profile picture
Carlton Getz, CFA


  • GNC’s forthcoming joint venture in China will have a material impact on the company’s reported financial results.
  • The terms of the joint venture were modified in the most recent announcement which significantly reduced the short term value to GNC.
  • The China business will be converted into a combination of equity earnings and wholesale revenues.
  • We provide an initial outline sketch of the potential financial impact.

GNC (NYSE:GNC) is set to establish a joint venture with Harbin Pharmaceuticals early in the coming year (pending closing of the final preferred stock transaction) which will replace the company’s current business in China. The joint venture will impact the company’s financial results in various ways, not the least of which will be reduced near term operating income as a result of the effective transfer of a 65% interest to Harbin.

Moreover, while not discussed during the company’s third quarter conference call, the most recently announced terms for the joint venture differ from those included in the original joint venture announcement and are significantly less beneficial to GNC. In particular, the valuation of the China business has been more than halved under the current terms.

In this article, we discuss this change in the joint venture terms and provide an initial sketch of how the joint venture structure may impact the company’s operating results in the near and intermediate term. The sketch provides a starting point for developing further perspective on the impact and potential of the joint venture and represents one aspect of the company’s business being incorporated into our revised models based on the third quarter results and coincident joint venture announcements.

The Joint Venture Terms

The announcement regarding the modifications to the Harbin preferred stock transactions, in particular, the division of the preferred stock investment into three separate tranches, also included updated information on the structure of the proposed joint venture. The modifications to the structure were not discussed on the third quarter conference call but represent a material reduction in the value of the business and the short-term benefit to GNC.

The original joint venture terms, as outlined in the original joint venture and preferred stock announcements, were reasonably favorable to the company. The implicit valuation placed on the

This article was written by

Carlton Getz, CFA profile picture
The author writes on behalf of Winter Harbor Capital, a private fund, and oversees private portfolios for individual and institutional clients. The author founded an investment company in 1995 with the view that a value oriented investment philosophy focused on intrinsic value and long term opportunities could generate superior absolute returns over time, leading to portfolios with unusual investment tenure sometimes exceeding 10 years. In addition to stints in micro and small capitalization research at Wasatch Advisors in Salt Lake City and in private banking with J.P. Morgan Private Bank in New York City, the author is a registered investment advisor, licensed professional engineer, and graduate of the Darden School at the University of Virginia.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We are effectively long through short put option positions of various expirations and strike prices.

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