Adam Ismail05.01.11
On April 1—no joke—GNC went public for the third time, rising almost 5% just after trading. By most measures, the IPO was considered successful. The company even increased its value slightly as of the writing of this column. However, going public three times during a company’s existence is a bit unusual, and it is worth exploring the reasons why.
Often when a company goes public several times during the course of its history, it is likely because financial problems have caused it to go in and out of bankruptcy. Typically a company will work out a pre-packaged bankruptcy resulting in the company’s value plummeting. On the bright side, it usually comes out of bankruptcy with very little debt and on sound financial footing. General Motors is probably the most recent example of this.
The other reason companies tend to go public frequently is because they have demonstrated they can sustain value over the long-term, and this value is attractive to multiple parties. Companies that can generate positive value like this will be snapped up and acquired by competitors, which means they don’t usually return to the public markets. However, GNC is a unique case, because there aren’t too many supplement retailers with deep enough pockets to acquire a company the size of GNC. With $1.8 billion in revenues, GNC is big for the supplement industry, but hardly large enough to be able to defend against takeover threats from bigger retailers in other industries. However, its narrow focus on supplements differentiates its business model significantly from large retail chains in other industries, eliminating most traditional acquirers.
So who is left that can capture this value? Private equity and leveraged buyout firms, of course. These firms usually buy companies that generate high levels of cash flow from their operations, and try to acquire them at low valuations. However, these firms usually have to return cash to investors, and so they go into acquisitions with a plan to exit at some point. This usually involves selling the company or taking it public. Again, while GNC might not be the best property to sell to another company, as a standalone entity it has significant value.
This value could come from its growth plans. In the case of GNC, the company is growing quite rapidly in countries such as China. In fact, the company generated more than $210 million in free cash flow in 2010, growing nearly 18% over the previous year. This growth is largely a result of double-digit sales and stable administrative overhead. So basically, the company is generating a lot of cash and growing its cash-generation capabilities rapidly with almost no additional investment. Statistics like these make companies extremely attractive.
Notably, Ares Management and the Ontario Teachers Pension Plan, the two investment funds that owned GNC, actually tried to sell the retailer to China-based Bright Foods Group. However, the business was apparently too complex for Bright Foods, and the acquisition fell apart, with the Chinese company expressing an interest in bringing GNC’s products to China via another route. This could have been a costly way to achieve growth in China, and actually underscores how companies with different business models from GNC may have a hard time taking on such an acquisition.
The investment funds that owned GNC had also tried to take the company public twice before, but the IPO markets were not favorable. With the financial crisis in full swing in the beginning of 2008, very few companies actually ended up going public because there was too much risk that the banks would not be able to sell the shares. This time, however, the situation appeared to be just right. Notably, the investment funds did not sell all of their shares in the IPO, though, and still controls a majority share of the company. They apparently like the value that GNC has but have managed to get a portion of their initial investment back.
The investment funds now have an outlet to reduce their holdings if they eventually choose to do so, but the attractive financial fundamentals remain for GNC. It is a business that is efficiently growing its already-significant cash flow with a leading market position. Many financial buyers are interested in businesses like these.
Often when a company goes public several times during the course of its history, it is likely because financial problems have caused it to go in and out of bankruptcy. Typically a company will work out a pre-packaged bankruptcy resulting in the company’s value plummeting. On the bright side, it usually comes out of bankruptcy with very little debt and on sound financial footing. General Motors is probably the most recent example of this.
The other reason companies tend to go public frequently is because they have demonstrated they can sustain value over the long-term, and this value is attractive to multiple parties. Companies that can generate positive value like this will be snapped up and acquired by competitors, which means they don’t usually return to the public markets. However, GNC is a unique case, because there aren’t too many supplement retailers with deep enough pockets to acquire a company the size of GNC. With $1.8 billion in revenues, GNC is big for the supplement industry, but hardly large enough to be able to defend against takeover threats from bigger retailers in other industries. However, its narrow focus on supplements differentiates its business model significantly from large retail chains in other industries, eliminating most traditional acquirers.
So who is left that can capture this value? Private equity and leveraged buyout firms, of course. These firms usually buy companies that generate high levels of cash flow from their operations, and try to acquire them at low valuations. However, these firms usually have to return cash to investors, and so they go into acquisitions with a plan to exit at some point. This usually involves selling the company or taking it public. Again, while GNC might not be the best property to sell to another company, as a standalone entity it has significant value.
This value could come from its growth plans. In the case of GNC, the company is growing quite rapidly in countries such as China. In fact, the company generated more than $210 million in free cash flow in 2010, growing nearly 18% over the previous year. This growth is largely a result of double-digit sales and stable administrative overhead. So basically, the company is generating a lot of cash and growing its cash-generation capabilities rapidly with almost no additional investment. Statistics like these make companies extremely attractive.
Notably, Ares Management and the Ontario Teachers Pension Plan, the two investment funds that owned GNC, actually tried to sell the retailer to China-based Bright Foods Group. However, the business was apparently too complex for Bright Foods, and the acquisition fell apart, with the Chinese company expressing an interest in bringing GNC’s products to China via another route. This could have been a costly way to achieve growth in China, and actually underscores how companies with different business models from GNC may have a hard time taking on such an acquisition.
The investment funds that owned GNC had also tried to take the company public twice before, but the IPO markets were not favorable. With the financial crisis in full swing in the beginning of 2008, very few companies actually ended up going public because there was too much risk that the banks would not be able to sell the shares. This time, however, the situation appeared to be just right. Notably, the investment funds did not sell all of their shares in the IPO, though, and still controls a majority share of the company. They apparently like the value that GNC has but have managed to get a portion of their initial investment back.
The investment funds now have an outlet to reduce their holdings if they eventually choose to do so, but the attractive financial fundamentals remain for GNC. It is a business that is efficiently growing its already-significant cash flow with a leading market position. Many financial buyers are interested in businesses like these.
