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GNC Forms Joint Venture With IVC to Improve Cost Efficiency

Zacks Equity Research

GNC Holdings, Inc. GNC recently announced forming a strategic joint venture with a vitamins and nutritional supplement manufacturer — International Vitamin Corporation (“IVC”). Through the joint venture, GNC will integrate its manufacturing division with IVC.

Per management, IVC’s consistent supply of raw materials at reasonable prices, strong manufacturing processes and the buying power of both organizations will help GNC achieve increased cost savings. The joint venture will be manufacturing the products produced by the Nutra manufacturing facility.

Financial Details of the Deal

GNC is expected to retain an initial 43% ownership in the joint venture and slated to receive an aggregate of $101 million from IVC in exchange of Nutra manufacturing facility and the Anderson facility’s net assets.

Depending on the joint venture's future performance and subject to adjustments, GNC will receive an additional $75 million from IVC over the next four years as IVC’s ownership in the joint venture increases to 100%.

GNC’s Nutra business is included within the Manufacturing/Wholesale segment. As a result of this joint venture, the company expects decline of roughly $25-$30 million in the segment’s EBITDA in the near term.

GNC’s Other Joint Ventures

GNC has recently completed a transaction to form a joint venture with Harbin Pharmaceutical Group to strengthen its presence in China’s huge supplements market. The company is now set to launch two joint ventures with Harbin— Hong Kong-based China joint venture and China joint venture. Per management, these joint ventures will make a wide distribution network accessible to GNC and enhance the company’s manufacturing ability in China. Notably, the Hong Kong-based China joint venture, operating the existing cross-border e-commerce business was formed along with the closing of the Harbin investment.

Furthermore, GNC is ready to complete the China joint venture in a short span of time, and it will comprise the retail stores in China and the pharmacy distribution channel. On finalization of the joint venture, Harbin will contribute $20 million of working capital to the newly formed entity.

The joint venture will also aggressively invest in marketing and is expected to deliver $200 million in revenues over the next three years.

Share Price Movement

GNC has outperformed its industry in the past three months. The stock has gained 2.3%, against the industry's 21.4% decline.


Zacks Rank and Key Picks

GNC Holdings currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space are Varian Medical Systems VAR, Illumina, Inc. ILMN and DexCom, Inc. DXCM. Notably, each of these stocks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Varian’slong-term earnings growth rate is projected at 8%.

Illumina’slong-term earnings growth rate is expected at 21.5%.

DexCom’s second-quarter earnings per share are estimated to grow 116.7%.

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