Forstmann Little shapes up for $1.6bn

In a transaction involving two beleaguered private equity firms, Forstmann Little will acquire 24 Hour Fitness from McCown De Leeuw for approximately $1.6bn.

Legendary buyout firm Forstmann Little, in what could be its last major private equity investment ever, has agreed to acquire health club chain 24 Hour Fitness from Menlo Park-based private equity firm McCown De Leeuw in a transaction valued at approximately $1.6 billion (€1.2 billion).

Forstmann Little’s equity and subordinated debt funds will provide $900 million of the transaction financing with the remaining capital coming from a senior loan facility arranged by JP Morgan and Merrill Lynch, the financial advisors to Forstmann Little and 24 Hour Fitness, respectively.

Ted Forstmann, founder, Forstmann Little

The buyout of 24 Hour Fitness will leave Forstmann Little with only about $400 million in committed capital, a relatively small amount for a firm that over its twenty seven-year history has often pursued multi-billion dollar buyouts, some of which – particularly failed investments in telecommunications companies XO Communications and McLeod USA – have led to its downfall.

In an interview with the New York Times last fall, Ted Forstmann pledged to shut down the firm that bears his name as soon as 2006, and to possibly release investors of their remaining capital commitments before then. At the time, his firm had recently paid $15 million to settle a lawsuit with the state pension of Connecticut, which had charged that Forstmann Little had breached its partnership agreement by making the two telecom investments noted above, deals which resulted in losses of more than $1.5 billion.

The firm’s remaining $400 million could also possibly be used for add-on acquisitions, either for 24 Hour Fitness or IMG, the talent agency that Forstmann Little acquired last year for more than $700 million. In a statement, Forstmann noted that 24 Hour Fitness has “significant potential for growth” and that the company planned to penetrate existing markets and push into new ones. The company currently has 15 clubs in Asia, as well as 330 clubs in 16 states in the US.

24 Hour Fitness has a very strong market position, a superb management team and significant potential for growth, all characteristics we look for in an acquisition.

Ted Forstmann

Forstmann is no doubt hoping to replicate the success that McCown de Leeuw enjoyed in building up 24 Hour Fitness. The Menlo Park private equity firm first invested in the business in December 1994 – since then, 24 Hour Fitness has grown from less than $50 million in revenues to more than $1.1 billion today through acquisitions and internal growth.

However, the firm has also had its share of problems, both in its portfolio – its more than $100 million investment in Dimac was lost when the direct marketer filed for bankruptcy in 2000 – and in staff turnover. Founding partner David de Leeuw left in 2003 to found another private equity firm, Lion Chemical, a move that prompted McCown de Leeuw to reportedly shutter its New York office and tell its limited partners that the firm would avoid new investments in order to harvest the rest of its portfolio.