Bulking up at the gym

Summer is a busy time for the gym sector as people put in the hours to attain the perfect beach body. Private equity, it turns out, has been flexing its acquisition muscles too. By Robert Venes.

The bulk of the UK gym sector is in private equity hands or has passed through them in recent years. Firms such as Permira and Duke Street Capital have focused on growing these assets, but the sector now looks to be facing a period of consolidation.
 
According to media sources, two private equity-backed gymnasiums are attracting the attentions of trade buyers, property investors and rival financial buyers.
 
Esporta, a Berkshire-based gym and racquet clubs chain, was taken private by Duke Street Capital in July 2002 for £144 million (€214 million) and merged with Invicta Leisure, a £144 million purchase in September of the same year. Since then, the business has been refinanced twice, most recently with a £306.2 million debt package from Bank of Scotland.
 

If you look at the asset side of the business, there’s a huge amount of liquidity available to property investors at the present time and these are strong asset-backed businesses.

Simon Tilley, Close Brothers

Apax Partners and The Blackstone Group are in the running to acquire Esporta, with Citigroup appointed to manage the auction process. However, Richard and Ian Livingstone, owners of property group London & Regional, are also understood to be in talks with Duke Street Capital to buy the property assets of Esporta in return for operational control of Next Generation, a racquet clubs business, in anticipation of a merger. According to a source, talks have not yet taken place.
 
Whitbread, which owns David Lloyd Leisure, could also come into play if Duke Street Capital opts for an outright sale of the Esporta business.
 
Royal Bank of Scotland has also been talking to potential buyers regarding gym chain Cannons, a £260 million acquisition in 2001. According to the Sunday Times, Cannons could fetch up to £400 million, with Esporta a potential buyer, especially if the London & Regional deal is successful and gives it the necessary size to take on larger deals.
 
“The sector is going through a period of rapid consolidation at the moment,” says Simon Tilley, an assistant director in the debt advisory group at Close Brothers who led the recent Esporta refinancing. “If you look at the asset side of the business, there’s a huge amount of liquidity available to property investors at the present time and these are strong asset-backed businesses, like Esporta.”
 
Tilley, however, warns that deals that focus on separating the real estate and operating companies should be mindful of current levels of gearing: “One of the issues you need to consider if property valuations are to hold water is the viability of the operating companies once you separate them from the property side, as they are very highly-geared companies.”
 

Esporta: garnering private equity, trade and property investor interest

As a result of that high leverage, the gyms need to reach critical mass in order to survive what Tilley says is a challenging marketplace. “There was a huge amount of expansion in the late 90s and the early part of this decade, leading to excess demand, but now there is a greater degree of equilibrium, which is driving rapid consolidation,” he says.
 
Major deals in the fitness club sector in the last year include Bridgepoint’s sale of its 55 percent stake in Virgin Active back to Richard Branson’s Virgin Group for £134.5 million, representing a three times money multiple; Cinven’s sale of Fitness First, an international gym operator, to BC Partners for £835 million; Permira and Bridgepoint sold the Iberian arm of Holmes Place to Mercapital and Nmas1, two Spanish private equity firms, and Explorer Investments, a Portuguese private equity house .
 
Tilley says that there will be a number of further tie-ups in the next year – most likely in the second half of 2006 and going into 2007: “If consolidation is in private equity hands, there may well be new capital coming from those who have sat outside of the deals that have gone on so far, but it could also come from investors of subordinated debt capital like mezzanine investors or hedge funds.”
 
Private equity investors would do well to begin limbering up now.