Holmes Place to merge with Virgin Active

Holmes Place, the UK's most upmarket fitness brand, is to disappear later this year following a deal agreed with Sir Richard Branson's Virgin Active health clubs chain. Holmes Place will this week announce that it has agreed to merge its UK operation with Virgin Active's business.

In time, the combined operation is to be floated on the London Stock Exchange, though the IPO remains at least 18 months away.

Virgin has appointed the investment bank UBS to conduct a refinancing of the enlarged health club chain once the merger has been sealed. Under the takeover, some 46 Holmes Place gyms across the UK will be re-branded under the Virgin Active logo. The deal follows Virgin's acquisition of 13 Esporta clubs in the UK and Spain last year.

Bridgepoint Capital and Permira - the private equity companies that acquired a controlling stake in Holmes Place for £210m in 2003 - are to hang on to the clubs located outside the UK.

As part of the deal to merge the UK operation with the Virgin business, the private equity players will receive a stake in the enlarged business of between 12 and 15 per cent.

The deal will reunite Bridgepoint and Virgin Active as business partners. In 2002, the venture capital company invested £110m in the Virgin gym chain to help fund the expansion of the business in areas such as Italy, Spain and South Africa. Sir Richard bought back the stake in a deal worth £134.5m last year.

The enlarged business will be the second largest chain in the UK behind the rival Fitness First. It will have more than 70 clubs and around 350,000 members. Virgin Active achieved a £33m profit before tax last year and is expected to help improve the financial prospects of the Holmes Place gyms, which have struggled in the UK.

However, while there has been speculation that a deal between Virgin Active and Holmes Place could pave the way for an almost immediate £1bn flotation, a person familiar with the situation said such a deal was unlikely for at least 18 months.

Consolidation in the saturated UK health club sector has been anticipated for some time given the highly competitive market conditions. Fitness First was purchased by the private equity company BC Partners last year for £835m. Some chains, including Virgin Active and Holmes Place, have also looked overseas to drive growth in less crowded markets.

For Sir Richard, the move to consolidate in the UK health club sector follows the sale of Virgin Mobile to NTL earlier this year. NTL will rebrand its business under the Virgin logo early next year after striking a licensing arrangement with Sir Richard as part of that deal.