GNC (NYSE: GNC), having recently pulled its latest refinancing effort in the face of untenable loan terms, continues its march into the unknown. The hiring - for the second time - of Goldman Sachs to review strategic options returns us to essentially the same position as a year ago with the exception of a lower equity valuation and shorter debt runway. The sense of déjà vu is strong.
We've discussed before our rationale for a potential acquisition valuation of the company - and why we consider the China argument largely a mirage. However, from a transaction standpoint, we also believe that the only viable long-term option for the company is a sale of the entire company. We consider other potential transactions, such as a master franchise agreement or sale of the China business, largely counterproductive, fraught with strategic and tax risks, failing to address the potential interest deductibility issue for tax purposes, and yielding too little immediately available cash to be of significant value to the company. In this article, we discuss our rationale and the reasons that small incremental transactions for parts of the business won't ultimately resolve the company's situation.
We therefore believe GNC's sole objective from a strategic alternatives viewpoint should be an acquisition of the company.
