Harbin Bids $760M for GNC Amid Chapter 11 Filing
Harbin Pharmaceutical Group placed a so-called stalking horse bid of $760 million for GNC Holdings, the vitamin and herbal supplements retailer that filed for Chapter 11 bankruptcy protection June 23 and said it plans to close up to 1,374 stores in the U.S. and Canada by the end of the year.
That bid kicks off an auction process seeking higher and better offers, supervised by the bankruptcy court. In 2018, Harbin Pharmaceutical Group invested $300 million in GNC, with the last tranche received in February 2019, documents said. Proceeds were used to pay down debt.
Based in China, Harbin manufactures and distributes pharmaceuticals including antibiotics, Chinese medicines, animal vaccines and others. It traded on the Shanghai Stock Exchange for 3.33 Chinese Yuan June 23, down from a 52-week high of 6.53, according to Reuters. One Chinese Yuan equals 14 cents in U.S. currency.
GNC said the closures will help the retailer cut costs and enable an exit from the bankruptcy process by the fall. Its stock price dropped to 54 cents a share on Wednesday, a long way down from a $49 high in August 2015.
On June 18, the company approved cash incentives for key employees. The incentives were paid in advance of the filing with the requirement the after-tax portion be repaid "in the event that the incentive is not earned," although they can retain 75 percent of the bonus even if the company does not successfully emerge from Chapter 11.
Kenneth Martindale, chairman and CEO, received $2.19 million in a retention bonus; Tricia Tolivar, executive vice president and CFO, received $795,000; Ryan Ostrom, chief brand officer, $330,000; Carl Seletz, chief global officer, $330,000; and Steven Piano, senior VP, chief human resource officer, $258,000.
Such payouts, while typically causing outrage in the Twitterverse, are common in large bankruptcy cases, said Robert Haupt, an attorney with Lathrop GPM in Kansas City. He is not involved with the GNC case but has handled multiple bankruptcy cases for both creditors and debtors.
Hertz, for example, put aside $16.2 million for retention bonuses to 340 employees at "director level" or above, including $700,000 for its chief executive, before filing for Chapter 11 in May.
"From a practical point of view, everything that happens in bankruptcy should be designed to benefit all the parties," he said, adding the intent of such bonuses is: "Very simply, Is it worth it to the greater good for the business to retain its management, who very well may start looking for other jobs right now?
"Capital, management, employment, labor, it's always a dispute over who's most important to the process," he said. "Management here thinks they're so important and they're also the decision makers. Everyone can challenge that though," during the court process. "Are we paying too much?"
Rather than question a retention bonus, investors might ask why Martindale stayed in his post so long, since 2017. He also became chairman in August 2018.
GNC lost some $500 million over the past four years. In mid-May, it reported a $200 million loss in the first three months of 2020. That compares to $15 million in losses in the first quarter of last year.
In 2017, GNC revenue was $2.48 billion and its net loss was $148.85 million.
In 2018, revenue declined to $2.35 billion, attributed mostly to the closing of 87 corporate stores and disappointing ecommerce sales. Net income was $58.8 million. In 2019, revenue declined further to $2.068 billion, with a $35.1 million loss.
"In the restaurant business, you say 'never let cooks eat their own mistakes.' You don't want to reward the person who did the act that caused the problem," Haupt said about how to evaluate a CEO's performance. "In this world, though, and you know the other side is going to be, the market's been challenged, and certainly since March there's been factors that are unprecedented.
"Bankruptcy courts are essentially courts of equity, so the judges have tremendous power to make equitable decisions," he said.
GNC listed total liabilities of $895 million and assets of $1.4 billion in SEC documents. The largest debt, for $159.9 million, is owed to The Bank of New York Mellon Trust Co. in Pittsburgh, where GNC is based.
GNC had about 1,000 franchises in the U.S. and 1,949 outside the U.S. in 2019. They'll have to get in line with other unsecured creditors to be heard during the bankruptcy process, Haupt said.
"Courts are authorized to appoint committees of creditors. It's not uncommon for franchisees to get together, because their interests are so unique," he said. "They could ask the court to appoint the franchisee committee, and you would ask the company to pay for a lawyer for the franchisee committee.
"Franchisees invest in the brand, they put their blood and sweat into it. They have the absolute right to say, who's looking out for us?" Haupt said.