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Talking point: Fitness IPOs
The Gym Group recently completed a successful IPO and Pure Gym is also considering a flotation. What’s the likely impact on a growing fitness sector? Niamh Madigan asks the experts
One of the big headlines from 2015 was the high profile flotation of UK-based low-cost operator The Gym Group, now the only listed health club operator in the UK, with a current market value of around £260m.
The deal was all the more notable given the long absence of any health and fitness club operators from the London Stock Exchange; although Virgin Active has been regularly linked to potential IPOs – both on the London and Johannesburg stock exchanges – any such plans were shelved, at least for now, when the chain was acquired by South African investment firm Brait last year.
So what are the implications of The Gym Group IPO for the rest of the fitness sector? Can we expect other operators to float – and if so, who’s likely to be next?
There’s breaking news on that front: just last month it emerged that the UK’s largest operator, Pure Gym, is also considering a flotation; based on the current size of the business, its valuation could exceed £500m. Any deal is months off yet, but it’s a sign of growing investor interest in the health and fitness sector.
We’ve also already witnessed a handful of IPOs in the United States: Planet Fitness floated on the US Stock Exchange last summer, and SoulCycle is still said to be steering towards an IPO.
So what are the pros and cons of an IPO, and what should operators consider before embarking on this journey? What types of fitness operator might be best suited to an IPO, and are investors more likely to look favourably on other fitness sector stock market flotations off the back of the Gym Group’s success? What have been the factors behind The Gym Group’s successful IPO, how replicable is this by other operators? We ask our panel of experts for their thoughts.
John Treharne,
CEO,
The Gym Group
When we started The Gym Group in 2008, the UK health club market was very expensive and our model was disruptive: a value-based no-frills offering, 24/7 opening, and technology sitting right at the core of the business. That all made it very different from the traditional health club model and our membership reflects this: one-third of our members have never been in a gym before, so we’re growing the market. As a result, the City is very interested in what we’re doing.
Fundamentally the IPO was the best route for The Gym Group and for the people who work within it. The advantage of an IPO is that it gives the business long-term funding: we have a number of blue-chip investors who are long-term investors. We raised £125m, with about £90m being used to reduce the debt in the business and restructure it financially. The balance is to help us with our growth plans.
The share price has done as expected: we floated at £1.95 on 9 November 2015, and by 25 January 2016 the price had reached £2.35 – 21 per cent up on launch.
Is what we’ve done replicable? You have to have a credible business that’s profitable and that has growth potential. You have to have an attractive story to tell, otherwise people won’t be interested in investing in it: I think over the coming years our business will reach over 250 successful gyms. We currently have 74, so it will take us time, but our whole team is really focused on getting there.
It’s also an expensive process and involves retaining high quality lawyers, accountants and advisers.
"You need a credible business that’s profitable and that has growth potential, and you need an attractive story to tell" - John Treharne
David Burns,
Managing partner,
Phoenix Equity Group
A few years back, Phoenix started to look at the impact the low-cost model was having on sectors such as airlines, hotels and retail.
At the time, The Gym Group was one of the few health club operators with a low-cost model that was changing the face of the local market it was operating in. We saw a super opportunity to rapidly expand the business and felt The Gym Group had a great model, led by someone we had got to know very well, so in 2013 we invested.
Scale is becoming increasingly important in the low-cost gym sector, and these businesses rely on sophisticated technology and property capabilities. That isn’t easy for many firms to replicate, which is why it will be a small number of firms that get through the hoop to be listed on the public market.
Quite a lot of stars have to come into alignment: you have to have a good story to tell, a good historical performance, a team that’s credible, and be able to convince investors that you have a good opportunity ahead of you. It’s a complex and very time-consuming process, and businesses need the in-house capabilities to be able to cope with such a demanding process. The Gym Group is a good case study of what it looks like when you get it right.
"An IPO is a complex process, but The Gym Group is a good case study of what it looks like when you get it right" - David Burns
Nicholas Batram,
Travel & leisure analyst,
Peel Hunt
The IPO of The Gym Group is an important milestone for the health and fitness industry going forward. Going back 15 or 20 years, health and fitness clubs were a vibrant part of the stock market, with north of a dozen listed companies. In the early 2000s, companies left the market – either through take-overs or fails – so the stock market has been without a health and fitness operator for close to a decade.
The Gym Group team is very experienced and has been very disciplined in the roll-out of the brand. That was the Achilles heel of a number of operators looking back: they became ill-disciplined as far as the property side was concerned.
The Gym Group ticks the boxes of being a disruptive business model within a sector of the market that’s showing good structural growth, and where management has a lot of experience and is trusted. The low-cost model is definitely fuelling growth and bringing new consumers to the industry. If you look at the level of potential growth in The Gym Group, it’s very exciting.
Our clients who are looking to invest are looking for decent growth stories, decent management, decent returns and a real belief that they’re in an area of the market where they can see real delivery coming through over the medium term. You have to be 100 per cent committed to being a publicly listed company, and the most important thing is that it’s not the end of the journey – it’s the beginning.
Gareth Jones,
Head of leisure,
Mazars
We believe the successful flotation of The Gym Group is likely to galvanise competitors within the low-cost gym sector into possible similar action. As the industry is rapidly expanding, significant inward investment is required to retain previous levels of market dominance. The Gym Group, through the raising of £125m, now has sufficient resources to continue with a policy of expansion.
The success of this IPO, we believe, is replicable by comparable offerings. As seen in this case, the expansion of the company in recent years, combined with optimistic projections for sector growth, have allowed for a company valuation both beneficial to current and future investors – hence the success of the IPO.
And for any mid-market health clubs that don’t have a low-cost or high-end offering but that would like to consider an IPO? Any operation with a strong product stands a good chance of being successful within the capital markets; product offering is paramount.
Two main advantages of an IPO are the raising of capital and the introduction of more shareholder liquidity. A disadvantage is the increase in compliance costs to meet regulatory requirements. These aspects, inter alia, should be taken into account before an IPO is embarked upon.
"Any operation with a strong product stands a good chance of being successful within the capital markets " - Gareth Jones
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