According to documents filed with the SEC*, GNC is projecting a huge increase in its e-commerce business, rising from $146 million to $246 million this year (and estimated to hit $260 million by the end of 2021).
Combine this with strong brand awareness (see image below), good performance of its own brands, including GNC AMP, Beyond Raw, GNC Total Lean, and BodyDynamix, and exclusive partnerships with the likes of GHOST and Alani Nu, means that there are some who think that GNC will emerge as a very interesting entity post-reorganization.
Daniel Lourenco, CEO of GHOST (which is listed as a top 30 creditor in GNC’s bankruptcy filing), told NutraIngredients-USA: “From a brand/vendor perspective, I’m bullish and optimistic about ‘GNC 2.0’.
“The slimmer footprint will likely have a greater positive impact on GHOST’s business and will allow us and other vendors to create even better in-store experiences through more targeted merchandising, inventory and sampling programs.”
In a post on the investment site SeekingAlpha, investor Mark Gottlieb stated: “GNC should experience sticky if not higher demand for its products in a post COVID-19 world. This global pandemic is a health crisis, and this has brought attention to people's health and wellness.
“GNC just happens to be a major player in the health and wellness space. Because many of GNC's products also can assist with enhancing immunity (think vitamins and herbal supplements), one could argue that a good (and new) management team could ride this tailwind of increased awareness and strong demand.”
“Yes, the bankruptcy path is messy, and there would be a lot of headaches to work out while optimizing the store base. That said, GNC's store leases were relative short and much shorter than many specialty peers. Therefore, you simply close the stores upon lease expiration.”
The bankruptcy path
Darryl Laddin is partner and chair of the bankruptcy, creditors’ rights & financial restructuring practice at Arnall Golden Gregory LLP. Speaking with NutraIngredients-USA, Laddin explained that for a company there are two bankruptcy chapters: Chapter 7 and 11. Chapter 7 is a traditional liquidation: Management is gone, and a trustee appointed by an arm of the Department of Justice takes over liquidation of the assets.
Chapter 11, which is what GNC filed last month, is the traditional reorganization chapter. Management continues to control the company and make decisions subject ultimately to oversight by the bankruptcy court and judge. The company is called a “debtor-in-possession”.
There are three basic ways of getting through Chapter 11: First, and less common, is liquidation like Chapter 7. Second is sale of the company, the so-called “363 Sale” after the section specified in bankruptcy code. “This is the preferred way of many troubled companies to find buyers. Bigger companies may have lots of liabilities. These can be cleansed through 363,” said Laddin.
Third, is to submit a plan of reorganization whereby the company proposes a plan to its creditors.
Options two and three both offer the opportunity to terminate leases. GNC is reported to be planning between 800 and 1,200 store closures. GNC has already filed multiple motions to reject leases. The company can also renegotiate leases for better deals. “Outside of bankruptcy, companies have very little ability to renegotiate leases,” noted Laddin.
The creditors will play an important role in the process. The top 30 creditors listed on GNC’s petition include many dietary supplement manufacturers (contract manufacturers and third-party brands) owed between $4.85 million and $740,000.
Laddin explained that at the start of the Chapter 11 process there is an automatic stay introduced that stops anyone from collecting on debt.
“GNC has about $110 million of trade debt, and the stay means that those vendors can no longer collect on those claims,” explained Laddin. “However, what some companies will do [and what GNC did do] is file a critical vendor motion, which would seek to set aside money to pay suppliers of GNC own brand products, the suppliers of third-party brands, packaging providers, and providers of IT and advertising services.
“What is unusual is the amount of money for those critical vendors,” said Laddin. “GNC has sought $25 million on an initial basis, and up to $40 million on a final basis, to pay those vendors. This is a good deal if you’re a trade creditor. The court entered an interim order approving this.”
Between three and seven of the creditors will participate in an official creditors committee, he added, and they are entitled to be heard in a bankruptcy case.
GNC is also reported to be negotiating with a subsidiary of Harbin Pharmaceutical Group Holding Co., its largest shareholder, with Harbin serving as the Stalking Horse Bidder (the initial agreement puts a value of $760 million on GNC).
Under a 363 sale, GNC would sign an asset purchase agreement and then hold an auction process. Other bidders would submit bids on basically the same form as the stalking horse bid, said Laddin.
Pre-COVID, most bankruptcy auctions were conducted in person. It has not been announced if and how such an auction would occur for GNC, explained AGG’s Laddin.
Will we see a bidding war? We should, according to investor Mark Gottlieb, who values GNC closer to $1.5 billion.
“If a CPG company, with a talented M&A group, activates its imagination, it makes all the sense in the world for there to be a bidding war to acquire this business in the bankruptcy auction,” wrote Gottlieb.
* To view GNC's presentation submitted to the SEC, please click HERE.