GNC Holdings' (GNC) announcement on Monday that it was conducting a strategic review of its business opens up a whole host of possibilities for the Pittsburgh-based retailer of nutritional supplements.
The review was likely triggered by the plunge in GNC stock of almost 30% to $25.32 on Thursday after the company reported that same store sales fell 2.6% in the first quarter. Thursday's decline was even more stunning in light of the fact that the 52-week-high for GNC was more than $51 per share.
GNC shares, however, were up more than 6% in mid-day trading on Tuesday to $25.89 on the news it hired investment bank Goldman, Sachs (GS) as its financial adviser on the review.
One of GNC's main options would likely be to sell to a private equity firm.
The retailer currently has a market cap of close to $1.8 billion. Add in debt of approximately $1.45 billion and subtract cash of nearly $60 million from the retailer's balance sheet, and the company has an enterprise value of close to $3.2 billion.
That works out to about 7.1 times the company's projected adjusted Ebitda for its current fiscal year of around $450 million, according to data provided by Bloomberg. And that is close to the kind of valuation private equity firms have historically found enticing.
Retail more broadly has had its struggles, as GNC's recent quarterly results help to illustrate.
However, unlike apparel retail, for example, the sale of items such as food and supplements have proven to be more stable over time.
And nutritional food supplements as a category has seen a number of fast-growth entrants recently, such as Vega Co., Quest Nutrition LLC, Health Warrior Inc., Perfect Bar & Co., and many others that are helping to attract millennials and grow the segment.
In fact, private equity firm VMG Partners acquired a minority stake in Quest in 2015, valuing the company at around $900 million, while that same PE firm sold Vega to WhiteWave Foods (WWAV) for $550 million, also last year.
The demand for plant-based protein from the likes of Quest and Vega, including protein powders, is driving the valuations.
And it is possible that GNC can attempt to focus on the fast growth of natural, organic and plant-based supplements and foods to help turn itself around, while relying less on the sale of more controversial supplements.
Another option that has been floated for GNC is for it to merge with rival Vitamin Shoppe Inc. (VSI) , which currently has a market cap of almost $700 million.
GNC could certainly take on more debt to finance such a move, though it would be risky. Companies can typically take on debt of up to around 4 times Ebitda and remain investment grade.
Vitamin Shoppe shareholders might also be convinced to accept shares in a newly combined entity, reducing the need for debt financing.
At the same time, a merger of the two businesses might be better accomplished by taking them private.
Other options the review will likely weigh are the repurchasing of stock and accelerating the re-franchising of store locations, among others.