Summary Points: 
- A private equity acquisition of both GNC and Vitamin Shoppe makes more sense than buying GNC alone.
- The deal will leave private equity with more upside and result in a premium that GNC/VSI investors will accept.
- The deterioration in GNC financials increases the difficult of getting the deal done. VSI is an alternative way to get exposure to any positive events at GNC with less risk.
Rumors have circulated regarding a buyout of GNC (NYSE:GNC) by private equity firm KKR (
click here or click here). It is my opinion that based on the numbers, a deal for GNC alone may be difficult due to the company’s leverage, however if the deal included Vitamin Shoppe (NYSE:VSI) then it becomes more attractive. A position in VSI could give an investor exposure to positive events at GNC with less risk. I’ll explain my rational in this article.
A potential sale to private equity is an idea that goes back almost a year. Back in May 2016, TheStreet had an article on GNC (click here) and pointed out that 7x EV/EBITDA is “close to the kind of valuation private equity firms have historically found enticing.” With the general market trading higher than a year ago this ratio may have risen but let’s go with it. Also, according to SA contributor Integer Investments’ sources (click here), the deal could be worth up to $3.5bn. Does the $3.5bn make sense? Well if we use the 7x multiple on 2015 adjusted EBITDA then we get $3.4bn.
