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Debt-burdened Herbal Magic enters private equity deal

Store front for a Herbal Magic Weight Loss and Nutrition Centres shop in Kamloops, BC. The weight-loss chain has filed for bankruptcy protection, and has a tentative deal to be acquired by the private equity firm founded by Bay Street financier Steven Hudson.

DON DENTON/The Canadian Press Images

Herbal Magic Inc. is losing some of its magic.

The country's largest weight-loss chain filed for bankruptcy protection this month, owing creditors more than $77-million. Now, it has a tentative deal to be acquired by the private equity firm founded by Bay Street financier Steven Hudson, who is chairman of Herbal Magic and an investor in the ailing chain.

Mr. Hudson intends to shut about 60 of the chain's 247 stores, let go 188 of 562 employees and continue operating, court filings say.

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On Friday, the Ontario Superior Court of Justice approved the sale, which is expected to close next week. It did not disclose the purchase price.

"Failing the closing of the sale transaction before the end of July, 2014, Herbal Magic will have no cash to fund its business and will have to cease operations before the end of August," a court filing says.

Herbal Magic is struggling in a weight-loss industry that is feeling the pressures of online alternatives and calls for more transparent pricing. From Weight Watchers to Jenny Craig, the diet business is slimming down as consumers seek conventional nutritious options.

Herbal Magic's program, with 7,600 customers and roughly $1,000 in annual membership fees, offers personal coaching and nutritional supplements. But some of its former clients have accused the company of selling pricey diet supplements to shore up its business, according to media reports. When Mr. Hudson's firm bought a 40-per-cent stake in the chain in 2009, it ran 350 stores across North America.

Mr. Hudson has had a colourful finance career, having founded Toronto-based financing firm Newcourt Credit Group with $400,000 and sold it in 1999 for more than $2-billion (U.S.) Then he invested in hair repair, through Hair Club for Men, and weight loss, through Herbal Magic, before returning to his roots of asset-backed financing in 2011, setting up Element Financial Corp.

Today, privately held Herbal Magic faces mounting losses, which last year reached a net $31.8-million (Canadian) on revenue of about $58.7-million, chief financial officer Stephen Brown says in a court document. The outlook still looks dim: In the first five months of 2014, it posted a loss of $14.4-million on revenues of $22.3-million.

In May, with the help of PricewaterhouseCoopers Corporate Finance Inc., Herbal Magic began to look for a buyer for its assets, contacting 145 potential purchasers, 43 of whom were rival "strategic" players and 102, financial entities, Mr. Brown's affadavit says. Of those, 39 signed confidentiality agreements, including Mr. Hudson's private equity firm, Cameron Capital, which had invested in the chain.

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Mr. Hudson is not referred to by name in the court documents, but rather as the chairman of Herbal Magic's board of directors and the "inside bidder." But "to preserve the integrity of the sales process, procedures were put in place to ensure that the inside bidder (including the parties with an interest therein) did not receive any information not available to the other bidders," Mr. Brown's document says. He and then chief executive officer Ted Starkman ran the sale process.

Herbal Magic's annual sales began to drop in 2008 during the recession, which "compounded the company's limited control over its franchised locations," Mr. Brown says.

The company closed underperforming centres, leaving it with 280 stores. It soon hired new senior management and started to acquire many of its franchised stores in a bid to control operations and bolster the bottom line. It now has 37 franchised centres.

Last year, Herbal Magic had debts of about $77.6-million and assets of $63.4-million, court documents say.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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