What happened
Shares of GNC Holdings Inc. (GNC) jumped as much as 31.5% in trading Thursday after a large investment got the go-ahead to move forward. The stock was holding up nicely, at a 27% gain on the day, at 11:05 a.m. EDT.
So what
The Committee on Foreign Investment in the United States approved Harbin Pharmaceutical Group Holding's $300 million investment in GNC, which will make it the company's biggest investor. The companies are also forming a joint venture in China to manufacture, market, and sell products there.
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Under the February 2018 agreement, Harbin will get $300 million of convertible preferred shares, which convert to common stock at $5.35 per share. The preferred shares will come with a 6.5% annual coupon. GNC says it will use the money to repay outstanding debt and for corporate purposes.
Now what
GNC is only worth about $300 million at its current stock price, so this is a massive investment for the company, leaving Harbin with about 40% of the company's stock once converted. The challenge now is making this investment into a financial turnaround, which will be easier with a smaller debt load. But after nearly two years of losses, there's reason to be cautious with GNC shares until a turnaround materializes.
