Handicapping the field: GNC sale still a horse race

Drug Store News, July 21, 2003 by Michael Johnsen

Although Royal Numico hasn't officially placed a for sale sign on its GNC division yet, the company began accepting informal bids for the unit last month. GNC, with some 5,300 stores in the United States, is expected to sell for as low as $500 million to as high as $1 billion. Numico originally purchased GNC in 1999 for $2.5 billion.

GNC had sales of $1.6 billion for calendar 2002. Same-store sales in the United States fell 6.8 percent to $355 million for the first quarter ended March 31, Numico reported.

Drug Store News picked the winner in the Sundown deal. Here's a look at the top contenders for the GNC business.

Thomas H. Lee Partners Drug Store News odds: 2-1

Bill Watts, who served as GNC's chief executive officer through October 2000, is the lead horse in the race to acquire GNC--especially after he stepped down from Numico's supervisory board and expressed an interest in the unit. Although Watts has spent the last three years with J.W. Childs Associates, a firm led by John Childs--the executive responsible for managing a buyout of GNC in 1989 for Thomas Lee--Drug Store News has learned Lee's group is more likely the money behind any deal that would reunite Watts with his former company.

From 1990 to 2001, Watts helped grow GNC from a 1,000-store chain that grossed $365 million in annual revenue to a chain of more than 5,000 locations with $1.5 billion in annual sales.

NBTY Drug Store News odds: 3-1

Word is that NBTY had a deal in the works for both Rexall Sundown and GNC in February that fell through. Given that NBTY walked away with Sundown, it stands to reason that it's still in the running for the GNC business.

And it is. NBTY has more to gain from a GNC acquisition, compared with the Sundown purchase, given the 544 Vitamin World stores it currently operates. And now, with several warehouses full of supplements to peddle, the deal would open more than 5,000 GNC doors and grant NBTY an owner's stake in the 1,000-store GNC/Rite Aid initiative.

However, analysts contend that although NBTY's current cash position has the company in strong standing, there is a limit to how much troubled baggage it can take on.

J.W. Childs Associates Drug Store News odds: 10-1

Of course there are those who believe this Boston investment firm could back Watts. The firm also boasts another former GNC chief executive officer on its board--Jerry Horn. Horn was GNC chairman from 1985 to 1999. He was president and chief executive officer from 1985 to 1991.

Bain Capital Drug Store News odds: 20-1

Bain Capital, which has a stake in drug chains Duane Reade and Shoppers Drug Mart and supplement makers Leiner Health and Nutraceutical, is one of the dark horses in the GNC race.

Kohlberg Kravis Roberts & Co. Drug Store News odds: 50-1

KKR, which acquired Shoppers Drug Mart in 2000 and brought the company public a year later, also is a dark horse.