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Business Analysis: LA Fitness chairman weighs up approaches to take business private

Chief executive Fred Turok could make £18m from shareholding in health club group

Rachel Stevenson
Tuesday 14 December 2004 01:00 GMT
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LA Fitness, the health club operator, may soon be the last in the sector to step off the treadmill of being a publicly listed company.

In the past three years, fitness companies have abandoned the stock market faster than the average new year gym recruit. Esporta, Holmes Place, Fitness First and Cannons have all delisted after seeing their share prices run out of steam and have gone into private hands.

But Fred Turok, the fitness enthusiast who founded LA Fitness in 1990, has always vowed "not to follow the herd", promising several times to keep his company publicly quoted.

It was Peter Jacobs, the chairman of LA Fitness, who was left to explain to shareholders yesterday that the company is now considering a number of takeover approaches, which "may or may not lead to an offer". At least one of the interested parties has demanded that Mr Turok stay on board as a condition of its bid, so he has been removed from the decision-making process that could land him a multimillion pound windfall. Analysts reckon a bidder for LA Fitness may have to pay as much as 270p a share, making Mr Turok's 16 per cent shareholding worth nearly £18m.

Shares in LA Fitness, which, with 70 clubs and 200,000 members, is one of the largest chains in the UK, shot up 15 per cent to 246p yesterday. They have already risen more than four fold since a low of 54p this time last year. As the competition peeled away from the quoted arena, LA Fitness became the only devoted home for investors wanting to tap in to the health club sector. So why is LA Fitness quitting now, just when the Government is pushing the nation off its sofas and into a more healthy, active lifestyle that its gyms can provide?

James Ainley, an analyst at Dresdner Kleinwort Wasserstein, said: "The timing is quite surprising. The sector has great prospects and is beginning to recover from when it was hit by too much supply."

Membership of health clubs has almost doubled since 1998, and now about one person in 10 belongs to a gym, including local authority-run facilities. The private sector accounts for more than half the health club business, with about 3.5 million people in privately run gyms. Membership fees are still often expensive, and can run to more than £50 a month, and the sector has also been plagued by fears that amid a downturn in consumer spending, gym memberships would be the first item of disposable income to be reined in. But Brigid Simmonds, of the trade body Business in Sport and Leisure, said the prospects for further gym membership growth were still enormous. "With continued efforts by the Government and the NHS to encourage people to have more active lifestyles and the increasing awareness on health issues, it is likely that the sector will continue to grow," she said.

LA Fitness has opened 49 clubs in the past two years and has promised more. There are some 1,982 private health clubs in the UK, according to the Fitness Industry Association (FIA), and about half of them are independently owned. It is still, then, a reasonably fragmented industry, and is ripe for consolidation at a time when growth possibilities are still very strong.

The quoted sector ran into trouble on the stock market only because it expanded too rapidly. Mr Ainley said: "There was too much supply. Too many companies listed on the stock market and too many clubs were built." Some companies were also hit in the aftermath of the dot.com crash and the terror attacks on 11 September 2001, when economic strife hit the City and thousands of out-of-work bankers could no longer afford their membership fees. New gyms stood empty, profit warnings soon followed and the City turned its back on the sector. With shares at all-time lows, private equity houses saw an opportunity to snap up cash-generative businesses with strong property assets. Royal Bank of Scotland's private equity team took over Cannons in 2001, Duke Street Capital took on Esporta in 2002, Bridgepoint Capital helped fund a management buyout at Holmes Place in 2003 and Fitness First also disappeared into Cinven's control.

Under private ownership, the sector has continued to perform well. Retention of customers had previously not been viewed as an issue for gyms, which rake in annual memberships paid in the first week of January regardless of how many times the customer actually turns up throughout the year. But Nigel Wallace, of the FIA, says the population is changing its fitness regime, and believes clubs are seeing the potential of attracting customers all year round. "Five years ago, January would always see a big spike in memberships, with another one in October. But we are seeing a flattening of that cycle, as people make longer-lasting lifestyle choices all through the year. Gyms used to not really care about customer retention, but we are seeing them become increasingly targeted at certain sectors of society, be it women-only gyms, family exercise centres, to get the benefits of year-round membership," he said.

LA Fitness recently said it would trial dedicated weight-loss centres to tackle the problem of obesity. Its revenues from private training sessions, merchandising and advertising rose 11 per cent last year, and account for more than 10 per cent of income.

So it seems that two years after the bloodbath in the sector, health clubs are still in demand. The prime suspects for approaching LA Fitness are some of the private equity businesses that took on the sector. Many are in the middle of their investment time period, and consolidating the sector would give them an opportunity to drive through cost savings before exiting.

James Wheatcroft, an analyst at Investec, said: "With LA Fitness shares at these levels, it does look fully valued. The only people who could afford to win a bid situation is [a group which] could make some cost synergies."

Few sector commentators doubt that further consolidation is necessary, particularly as private equity owners will soon want to exit with a better return on their money. Mr Wheatcroft said: "The private equity buyers have found life quite tough. At the time they bought in, there was too much capacity. Private equity buyers slowed down the expansion in the sector and have looked at consolidation. But it has taken longer than they thought."

But given LA Fitness's previous tough stance on remaining public, many investors thought it would be an active buyer in the market, rather than the other way round. Some analysts privately believe LA Fitness went to the City with some fund raising plans that were not well received, forcing it to consider a sale.

Mr Jacobs admitted that the approaches were at an early stage. "You would expect anyone buying a fitness club business to wait to see how January has gone before going much further," the LA Fitness chairman said.

He insisted no firm decision had been taken on whether to sell the business, but further changes of ownership in the fitness sector look inevitable, whatever the outcome of LA Fitness's bid talks. "We appointed Close Brothers to see if there was an appetite for a sale. It turns out there is, at a level that could be attractive to shareholders," Mr Jacobs said. "We have a duty to maximise value for them. But if we don't get an acceptable offer, we could still raise funds or go on an acquisition trail."

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