GNC: A Takeover Candidate No More?

It's been nearly a month since news reports said Chinese buyers were circling GNC Holdings (GNC) with an eye toward a takeover. And since nothing has come up since, it might be that the disappointing fundamentals of the nutritional supplements retailer are scaring off even motivated buyers.

GNC's estimates are calling for a 30% decline in year over year growth on an EPS basis, and have been plunging. Those forecasts have dropped more than 20% since the talks of Chinese enterprises' interests in the business cropped up. Net income is expected to drop 40% over year earlier levels.

At a multiple of just six times, the stock is - if nothing else - cheap. But the legitimate question is where anybody pegs the takeover price of GNC.

Six months ago, when it was reported that the company hired Goldman Sachs to help it sort out its options, GNC was said to be worth up to $4 billion: figuring its then market cap of about $1.8 billion - it's now about half that - combined with debt of about $1.4 billion could lead to a multiple of about 7 times its enterprise value. That kind of multiple is easily within the comfort zone of private equity buyers.

Still domestic buyers were tough to conjure, as company fundamentals continued to deteriorate. The so-called "new GNC" was lowering prices in more than half its items, and higher operating costs continued to whittle away at the company's EPS.

Turn, then, to the Chinese. While increasing health consciousness and diet awareness were popular themes among the populace, there was widespread corruption in China's indigenous nutritional supplement market. Fraudulent products and sketchy manufacturing were ruining the nation's domestic production of nutritional products. U.S. purveyors seemed to offer hope of something approaching integrity in the category.

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