GNC On The Block…Maybe

Examining GNC’s potential buyers.

By Adam Ismail

The New York Post recently reported that Numico, the Dutch nutrition powerhouse, had finally decided enough was enough with General Nutrition Companies (GNC) and put it up for sale. Numico had previously given GNC a one-year probation, but since that announcement was made, GNC has been hit by ephedra problems, a management shakeup, more franchise lawsuits and an ex­pensive store overhaul. Although Numico denies it has decided to sell the company, it has acknowledged that it is in discussions with potential buyers for GNC.

The buyers are the interesting part of the deal because according to the New York Post, they include the top leveraged buyout (LBO) firms in the world, including Kohlberg Kravis Roberts & Co. (KKR), Thomas H. Lee Partners, Clayton Dubilier & Rice and JW Childs Partners. Also mentioned as possible bidders were Bain Capital and NBTY. A lot of these names are not very well known outside of the financial sector, however, these tend to be companies that see value in fallen angels and then take out a large amount of debt to acquire them and turn them around. They are investors of course, so once the company is turned around they sell it off and reap the profits. The track re­cords are impressive and say a lot about their abilities to turn GNC around.

KKR, probably the most exclusive leveraged buyout firm in the world, has acquired and turned around many of the most famous companies in the U.S., such as RJR Nabisco and Beatrice Foods. Furthermore, the firm also has retail expertise that could be valuable in a GNC takeover, having turned around companies like Fred Meyer, Safeway and Stop & Shop in its 27-year history.

Thomas H. Lee is another one of the most secretive and exclusive LBO firms in the U.S. In fact, it is so secretive that it does not even have a web page. However, this has not stopped it from being successful, having acquired names like Houghton-Mifflin Publishing in recent years. The company has invested $5 billion since 1974 and over the years has turned that into $37 billion, averaging a 76% rate of return per year. The Boston-based firm actually organized a buyout of GNC for $361 million in 1985, but enlisted management’s help and turned the company around before taking it public in 1993.

JW Childs is closely related to Thomas H. Lee. The company was started when John Childs left his position at Thomas H. Lee and added several of the contacts he made at the company to his, including Jerry Horn and William Watts, two former GNC CEOs. Many people consider JW Childs a frontrunner in the GNC race because Jerry Horn served on the executive board of Numico. Mr. Horn left that position to pursue the GNC acquisition, but will not get special treatment in buying GNC, according to the company. JW Childs is no stranger to success, having turned around large companies such as Snapple Beverages, Cinnabon and The Ghiradelli Chocolate Company. It also currently owns companies like Nu­trasweet and Chevy’s Mexican Restaurants.

Bain Capital is a bit unique because it is not focused exclusively on leveraged buyouts. Instead, its interest in GNC may tie into its 40% stake in Nutraceutical International. The ac­quisition could create numerous synergies between the two companies and Bain has always been able to attract and recruit top management talent. It is uniquely positioned because it knows how to operate quite successfully in the supplement space. Despite the tough ride for supplements lately, Nutraceutical is on its way to reporting a third consecutive year of increased earnings.

Finally, NBTY remains the only company out of the potential suitors devoted to the industry that has a reasonable chance at acquiring GNC. In NBTY’s discussions with Numico it had enough interest in GNC to try and acquire it in conjunction with Rexall. NBTY may be interested in the retailer because it is the biggest competitor to its Vitamin World chain and it already owns GNC’s U.K. stores. That said, however, a possible GNC acquisition may be too much for NBTY to handle right now as it is already spending $250 million to acquire Rexall.

So who is going to win the race? Well nobody knows at the moment, but each has a unique advantage over the other. It may simply come down to a matter of dollars, but if Numico holds any stake in the company it may come down to the investor that has the best capabilities to turn GNC around…a tough proposition regardless.NW