We bought GNC Holdings (GNC) on Nov. 3 after its share price plunged 40% in late October on the heels of a disappointing quarterly earnings report that missed on both the top and bottom lines. We felt the selling that followed that news was excessive, setting the stage for a nice bounce once equilibrium was restored to its pricing.   

Since then it has moved in fits and starts as differing opinions about its viability as an acquisition candidate have surfaced (recent example). Before the October earnings report, a buyout from a Chinese company was deemed all but inevitable. Now the thinking is GNC’s recent problems may scare away potential suitors.

I understand that concern, but I smell a new deal in the works. If GNC is willing to retain its U.S. operations so that only its stores in Asia are sold to the Chinese buyer (which is rumored), then I expect either a private equity firm or a commercial REIT will step up to buy the domestic portfolio. I don’t expect this type of arrangement to fetch a huge premium as GNC is negotiating from a position of weakness, but even a total buyout price in the $17-to-$19 range will achieve our target return.

If I am correct, then I expect GNC to continue to trade in a fairly narrow range until rumors of such a transaction begin to surface. In the meantime, I’ll be watching for confirmation signs, such as increased call option buying with near-term expiration, to indicate the insiders are getting close to a deal.