Citic Capital arranges last-minute rescue for GNC

The private equity firm was the fixer for its portfolio company’s JV and bought time from its creditors for GNC. Its role highlights a growing trend in China’s going-out deals.

Harbin Pharmaceutical Group (Hayao) agreed to pay about $300 million for a 40% stake in US vitamin firm GNC Holdings and seal a joint venture in China, the companies said on Tuesday.

But it was Chinese private equity firm Citic Capital that brought the two parties together and gave Hayao the confidence to invest into GNC which is being hounded by creditors, according to a person familiar with the talks.

Pittsburgh headquartered GNC, which retails and makes vitamins, minerals, and nutritional supplements, will use the capital to pay down debt.

During a frenzied two-to-three week period after Citic Capital, Hayao and GNC entered into exclusive negotiations, all of the parties managed to hammer out a framework for the deal and stave off demands from GNC’s lenders, the person said.

The real prize for state-controlled Hayao and Citic Capital was control of a joint venture in mainland China to make and sell GNC’s branded producted in the fast-growing $20 billion market for supplements.

GNC would receive royalties on the products sold by the joint venture but Hayao would own 65% of the joint venture, according to a filing with the Securities And Exchange Commission.

Increasingly private equity firms are helping many first-time Chinese companies negotiate overseas purchases and bring back technology or branded goods to sell in China’s burgeoning domestic market. A helping hand from funds is particularly valuable given the increasingly treacherous regulatory environment for cross-border M&A and the difficulty of securing finance for acquisitions.

“This partnership will provide us with the expertise to navigate the competitive Chinese landscape and rapidly expand our brand in China," said Ken Martindale, GNC chief executive officer.

Hayao directly operates more than 300 pharmacies and collaborates with around 800 drug and supplement distributors across China. GNC will use Hayao's distribution network and its "Blue Hat" registrations required for sales in China.

Hayao’s chairman Zhang Zhenping said in a statement on Tuesday he was confident he could deliver GNC products and solutions to millions.

Other MNCs have also come to the same conclusion in China: they need a local partner. McDonald’s sold a controlling stake in its struggling mainland China and Hong Kong in 2017. The year before, ride-hailing firm Uber Technologies agreed to sell its China business to Didi Chunxing. Yum Brands, the operator of KFC, also spun-off its Chinese business.

While the joint venture was always the goal, buying a stake in GNC after its shares have fallen from $10.95 last July to $4.19 on February 12 was also seen as an attractive deal by Citic Capital. The move will make Hayao the single largest shareholder in GNC on a converted basis.

As a result, the GNC board will be expanded to 11 members including five members from GNC, five members from Hayao and Martindale.

Hayao’s investment, encouraged by Citic Capital, will take the form of newly issued convertible perpetual preferred shares with a conversion price of $5.35 and a 6.5% annual coupon payable in cash or in kind. The person familiar with the matter said private equity firms were comfortable with such sophisticated deal structures and in this case Citic Capital felt it would give it more potential upside. 

GNC will sell 299,950 convertible preferred shares for $299,950,000 in cash, according to an SEC filing

GNC plans to extend the maturity date of its term loan facility due March 2019 by two years. GNC will also issue a $275 million asset based credit facility as part of the maturity extension.

Fitch put its ratings of GNC on hold pending resolution of the $1.1 billion term loan refinancing. 

To be sure, GNC will be paying a substantially higher interest rate and has only bought itself two years – but there are signs in its latest earnings results that management’s turnaround plan is starting to have an impact.

According to equity analysts at Macquarie there is a “high probability the current lending group extends the 2019 maturity to 2021”.

The deal is conditional on a lot of factors, not just the consent of its senior secured lenders. It needs regulatory approvals in the United States and China. The Committee on Foreign Investment in the United states (Cfius) has been increasingly aggressive of late in blocking Chinese purchases of US assets. For China, consumer goods acquisitions are not particularly frowned upon.

The deal also needs to go through: approval from GNC shareholders – who face a 40% equity dilution and less likelihood of an all-out sale of the company – and definitive agreements on the joint venture.

If the deal falls through GNC may have to pay a termination fee of either $10 million or $18 million to Hayao and expenses of up to $3 million. Meanwhile, Hayao would have to pay a termination fee of $18 million to GNC. More US companies have been asking for big termination fees given the rising number of incidents of regulators blocking their overseas purchases.

However, if all goes well, the companies expect to close the transaction in the second half of 2018.

Hayao had Morgan Stanley as its financial advisor and PingAn Securities as PRC financial advisor. Junhe Law is acting as PRC legal adviser to Hayao while Ropes & Gray provided it with US legal advise.

GNC hired Goldman Sachs as financial advisor and Latham & Watkins as legal advisor.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media