February 14, 2018

Breakingviews: GNC’s China Pill Could Prove Poisonous

by Breakingviews.

GNC is overdosing on Chinese medicine. The ailing U.S. vitamin and supplements retailer is selling about 40 percent of the company to Harbin Pharmaceutical. The state-controlled enterprise also will appoint nearly half the directors on an expanded board, giving it quite a bit of muscle.

Faced with declining sales and a market value that has been sliding even more quickly, Pittsburgh-based GNC hired Goldman Sachs in 2016 to conduct a strategic review. Turnaround efforts that included converting more stores to franchises haven’t been enough to contend with growing online competition. As recently as November 2013, the company’s shares were trading at about $60 apiece. Before Tuesday’s deal, they were hovering around $4.

Instead of an outright sale, GNC is betting big on China. Only about 7 percent of revenue last year came from its international division compared to 81 percent for the United States and Canada. Growth in the People’s Republic – thanks to health-conscious young consumers – soon could make it an even more formidable market. It is forecast to grow to $27 billion by 2021 from $18 billion in 2016, according to Euromonitor International.

Harbin provides GNC with a distribution network of nearly 2,400 pharmacies across China for their new joint venture there. Assuming it receives all the necessary government approvals, the deal also should help the U.S. company navigate a complex overseas regulatory environment.

Even so, GNC’s deal is pricey. It receives a 28 percent premium to where the shares last traded, but the conversion price of $5.35 is also a far cry from a few years ago. And while it will use some of the $300 million to pay down debt, a 6.5 percent coupon means it will shell out $20 million a year to Harbin, either in cash or more preferred stock.

In addition, Harbin and GNC will have plenty of competition in China. Overseas vendors such as Australia’s Swisse are gaining market share there. With Harbin occupying five of 11 seats in the boardroom, it also gains considerable clout over any future moves. That includes a say if rivals were ever to express any interest. In exchange for a rescue, GNC may have just swallowed a poison pill.

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