It seemed to be a sign that the fitness industry had come of age, when, in the 1990s, several British fitness companies ventured into the public capital market. However, the fitness industry and the stock market were not exactly best friends in those days. While shareholders aimed for fast results, fitness clubs with their expensive and aggressive growth strategies were costing a lot of money and, initially, those results failed to materialise. Disappointing stock market results combined with low interest rates eventually caused a massive return to the private capital market.
The first public-to-private transaction occurred in 1995 when leisure giant Whitbread acquired headed for the gym acquired 16 health and fitness clubs under the David Lloyd Leisure brand (not a private equity transaction) for £200m (E295.6m). This was followed by public-to-private takeover of Cannons in a £260m (E384.2m) deal backed by Royal Bank and PPM Ventures. The investment was part of a £150m (E595.6m) financing to support a rollout of clubs in the UK and the Netherlands, an expansion strategy that had to be adjusted a few years later. In the meantime David Lloyd Leisure to ok over the Dutch Health and Fitness clubs.
Another example is Fitness First. This stock exchange-listed chain was in serious financial trouble in 2002. The stock exchange rate nose-dived 60% and Fitness First did not succeed in attaining new funds. Fitness First delisted from the stock exchange following a takeover by the Private equity fund Cinven and Fitness First management. Together they acquired the majority of the stock for £403m (E595.6).
The majority of the large fitness chains are now back in the hands of private equity funds after disappointing experiences with being listed on the stock exchange in the 1990s. European fitness chains owned by private equity funds include Holmes Place, Esporta, Scandinavian SATS, Elixia, Virgin Active, Total Fitness, Aspria and recently LA Fitness.
You have to ask: Why are private equity funds suddenly so interested in the fitness industry and what makes them want to invest in health and fitness clubs? How did the large fitness chains such as LA Fitness, Holmes Place and Cannons Health and Fitness-all once stand alone clubs-acquire the necessary equity to fund their growth plans?
To answer these questions, CBE interviewed Fred Turok, CEO of LA Fitness, Ian Burke, CEO of Holmes Place, and Harm Tegelaars, non-executive deputy chairman of Cannons and 2006 IHRSA European Club Operator of the Year, about their experiences with private equity funds.
CBE: In the past few years the majority of the European fitness chains have moved from the public to the private sector. What are the reasons behind this move?
Turok: The stock market and the fitness industry were falling out of love. The investors' general opinion was that the industry was under performing, which resulted in loss of interest.
Burke: In the late 1990s the fitness industry was growing extremely fast, subsequently there was enormous debt as well. The results were not in line with the expectations of the general public, thus confidence faded. Banks are usually not interested in financing operations of this scale, so the best alternative is funding through private equity.
Tegelaars: Besides, rules and legislation for the listed companies sector are stricter than for private sector companies. Investors expect fitness chains to grow in a straight line but it does not always happen like that.
CBE: The fitness chains all started as stand-alone clubs. What are the reasons why an investor would finance your funding requirements?
Turok: There are two very important reasons. Your fitness centre model has to be scaleable and repeatable, so whenever you are ready to open your next centre, you do not have to invent the wheel all over again. Secondly, you need a reliable and strong management team. Investors need to believe that management is capable of realising growth strategies.
Tegelaars: You need vision. You need to be able to explain that your club has potential to grow into a chain of clubs and that your formula differentiates itself from other clubs.
Burke: An investor wants to see a successful track record and people with knowledge and passion. The quality of your staff is therefore very important.
CBE: What is the role of a private equity fund in the company's organisation? Are they only involved with the long-term strategy or do they influence day-to-day management?
Burke: A big advantage of a private equity fund is that they have an extensive knowledge about your company and the market. They have done extensive research and they know what the possibilities and the potential difficulties are. Quite often they put a new team in place to realise their strategies. This means that everyone has the same objectives and therefore there is no need to monitor day-to-day operations.
Tegelaars: It is a matter of synergy. The team has designed the strategy and the business plan and approved of it together. If there is a change in the situation and you need to re-adjust the business plan the team would work together to implement the change.
Turok: Because the investors are very well informed about your business and the market your business operates in, the objectives are generally very realistic. Investors know that they have the right team to meet the objectives so there is no need to get involved with the day-to-day operations.
CBE: Investors want to see growth. What are the most important factors to realise this?
Turok: LA Fitness has several objectives related to growth. Our first objective is to attract more members with a right quality-price balance. Second, we plan to retain the memberships. Third, we plan to reduce costs. We clearly see growth potential because obesity is becoming a serious problem. If we have the right resources to deal with this problem, then the market will double in 10 years' time.
Burke: Holmes Place is not focused on acquiring more clubs. We want to offer members more value for their money. We expect that if we improve our relationship with our members, we will reduce the attrition rate. Equally important is that management is in touch with what is happening in the clubs, so you can adjust your strategies when necessary.
CBE: What about the infamous 'exit strategy'? The investor wants to make up the bill one day. Does this influence the way the chain is managed?
Tegelaars: It is usually outsiders that are preoccupied with exit strategy and not the CEO.
It is there in the background but it is not of immediate importance to the day-to-day operations.
Burke: Of course, one day we will go our separate ways but that does not affect the working relationship. It is good fun to work with these private equity guys.
