GNC Holdings (GNCIQ) has been trading on the pink sheets since after the parent company filed bankruptcy on June 23, 2020. The bankruptcy filing included statements about a "stalking horse bid" by the Chinese company Harbin Pharmaceuticals, the largest common shareholder and an existing partner for GNC in China. This bid was accepted as the starting price, as GNC intended to have an auction for the company. Hoping for a higher bid despite the common being likely to be wiped out, shares of the common stock did drift lower on the "pink sheets". There was some hope on chat boards for a Hertz (HTZ) or J.C. Penney (JCPNQ)-like bounce, however this never materialized. The GNCIQ share price slowly drifted down to the $0.13-to-$0.15 range, where it has mainly traded for the past few weeks. The deadline for other companies to submit a bid was last Friday, Sept. 11, with the auction set for Sept. 15. However, no higher qualifying bid was received, and the auction was canceled.
I previously published a cautious article on GNC, recommending that investors avoid this dumpster fire. Any ideas that COVID-19 was the cause of GNC's bankruptcy are unfounded - revenues, sales and cash flow have all been steadily decreasing for the past few years. Management tried halfhearted measures with international partnerships and online expansion, but also spent large sums of money on share buybacks instead of paying down debts. Tranche loans, a FILO loan and the company's revolving credit facility were all showing signs of an imminent bankruptcy if creditors didn't extend maturities or accept delayed payments, as did landlords and suppliers. From a recent share price high of $3.28 in early November 2019, the share price drifted lower until February, and in the COVID-19 market sell-off the share price fell off a cliff, dropping below $0.50 a share and remaining there all spring.
What This Means for Common Stockholders
In the original bankruptcy filing, Harbin Pharmaceutical, a Chinese company that is GNC Holding Inc.'s largest shareholder, has agreed to buy the global supplements company for $550 million cash and the assumption of certain liabilities, according to a filing in U.S. Bankruptcy Court. In addition to the aforementioned cash, Harbin will pay off $210 million of GNC's secondary loans and issue $10 million in junior convertible notes to GNC's unsecured creditors, as well as assume most operating and other liabilities. This will leave no value for common shareholders, and sometime in October, the existing shares will be worthless.
This could have been expected, as other retailers in bankruptcy have not fared well. When no REIT bidder emerged for J.C. Penney, which actually owns some of their spaces unlike GNC, the writing was on the wall. While the auction remained open, the likelihood of a bidding war became less and less likely. It is probable that some of the hedged investors in various tranches of GNC debt and common realized they would likely be throwing good money after bad if they had challenged Harbin's bid.
A look at GNC Holdings last quarterly report dated Aug. 10 shows why a bidding war likely didn't ensue. Harbin's bid was majority cash ($550 million) and the remainder assumption of certain liabilities made up the remainder. $200 million of the cash will be used to pay "debtor in possession" financing, however the August 10-Q shows this amount to be $305 million. Other creditors not in these agreements (leaseholders, vendors, partners) are likely taking equal if not more substantial haircuts. In the bankruptcy filing and reports, most of the cash will be split primarily among the Trance B-2 debt holders, with many articles previously placing this amount at $185 million or the sale likely not closing. If the sale closes, Harbin will receive equity in a new company (GNC Newco in the filing). If not, a new bankruptcy will likely be filed, liquidating GNCIQ completely.
Due to no new bidders joining the auction, and no bidding war ensuing, it is highly likely GNCIQ common shares will continue to drop until they are wiped out and the new "GNC Newco" equity created. I'm actually amazed the share price held up in the teens - many stocks in bankruptcy drop to only a few pennies, and the same may happen to GNCIQ quickly. With the sale to Harbin Pharmaceuticals - at the "stalking horse bid" price of $760 million - being the best option, the existing equity is basically worthless. A new Chapter 7 bankruptcy would also result in the equity being wiped out.
While I am not long, if I were, I would be entering sell orders overnight and get what I can as soon as I can. Honestly, I am surprised the shares have held up in the low teens (in cents) as long as they have. The "news" that parties are concerned about consumer data going to the Chinese at this late date seems like a last gasp to recover some value or have the government "require" an American bidder (like with TikTok) that, quite honestly, just isn't there in an open auction. While the CEO still owns a substantial number of shares, it is interesting that on the same day the auction was ended - Sept. 11 - he sold over 30,000 shares.
Conclusion
GNC's business model has been shaky for years, and there was little to be gained by entering a bidding war one of many supplement brands with a broken retail model in high-rent mall locations. While GNC had private-label brands, little differentiation exists, and Harbin's stalking-horse bid was high enough without being exorbitant. With no competing bids, there won't be enough cash from this sale for common shareholders to recover any value, and the share price should soon resume its drop, likely to 1 or 2 cents prior to the sale closing in October. Any existing shareholder should seriously consider selling for whatever they can get before being wiped out when the sale closes.
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John Alford
Conservative individual investor that tends toward value investing but not exclusively. Learning new strategies and look forward to sharing in dialogue with others here to learn. I taught a financial management for non-financial managers class as an adjunct professor that touches on financial statement and project financial analysis but am on an extended sabbatical due to other time commitments. At times a Seeking Alpha Top 40 REIT Contributor, Top 100 Mutual Funds and Financials contributor. Occasional blogger and public speaker on financial, political and spiritual education and improvement.
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