Fitness fad

Quoted health club operators have been lowly valued and can be acquired cheaply. But are they bargains? Comment from Breakingviews.

Private equity investors have been snapping up Britain's quoted health clubs. Over the past seven months there have been five leveraged buyouts worth at least £660m.


It is easy to see why stock market investors lost patience with the sector. Premium clubs have become known for making ambitious promises and providing mixed returns. Valuations have plummeted. Moreover health clubs certainly have suitable characteristics for private equity investment. They are very cash generative, and by consolidating clubs – as Duke Place Capital has done with buyouts of Invicta and Esporta – it is possible to achieve economies of scale. In addition, with the opportunity to expand established franchises into Continental Europe, growth looks guaranteed.

But that doesn't mean private equity buyers are snapping up bargains. If consumer confidence dips, clubs may see their retention rates ebbing away. And while low penetration rates in Europe are an opportunity for growth, it remains anyone's guess whether health clubs will take the Continent by storm. Buy and build is clearly the name of the game, but private equity's ability to successfully exit their fitness brands at a profit via trade sale, flotation, or sale to another firm doesn't look great. It may be hard to persuade stock market investors to back the sector again, while there aren't many obvious trade buyers either.

Can buyout firms be unaware of these risks? More likely, the dearth of private equity deals has pushed them into an acquisition regimen of last resort.