features
Talking point: Money talks
As we move into 2017, will economic conditions improve in the UK – and how can the health club industry get the capital it needs to grow? Kath Hudson reports
After a period of relative calm in the UK economy, the Brexit referendum result last June caused ripples large enough to derail the planned IPO of low-cost operator Pure Gym in October 2016.
Pure Gym had been planning to raise £190m to pay off debt and to bolster future growth, but CEO Humphrey Cobbold was forced to concede: “Given the challenging IPO market conditions, the board has decided not to proceed with a listing.”
Pure Gym is the UK’s largest gym operator, both in terms of clubs (163) and members (785,770) – so what does this mean for the rest of the sector? If even Pure Gym couldn’t pull off an IPO, will other chains be dissuaded from trying? And how does the broader investment community view the health and fitness sector – how should the industry go about getting the capital it needs to grow? We ask the experts…
Steven Ward,
Executive Director,
ukactive
Pure Gym was just one of a number of IPOs which ran into choppy waters last year across a broad range of sectors. However, ukactive’s recent report, Rise of the Activity Sector, shows that in the medium to long term, the prospects of our sector have never been stronger, and the diversity of interested investors has never been so deep and so wide.
Meanwhile, our sector straddles exciting macro trends – such as the integration of fitness and lifestyle with technology and wellbeing – which are impacting society globally. As long as the sector continues to innovate and evolve in line with these major trends, there are huge opportunities. However, investors have long memories and some never forget. There are many with burnt fingers from previous investments in the sector, and that of course adds a degree of caution.
We have a continuous rehabilitation job to do. Our sector needs to show a passion for innovation and new business models, display refreshed and invigorated leadership and take advantage of favourable trends. We also need to be more professional in the collation of market performance-related information. At a recent ukactive event, major investors criticised the sector for being behind in this respect.
Before long, when the choppy waters calm down, I expect another major player to come to market. It could be Pure Gym, given it’s already prepared, but don’t be surprised to see a dark horse storm through. It may be easier for another to float first and give investors a choice in another part of the market – low-cost operator the Gym Group is already listed on the stock exchange – leaving Pure Gym to complete a private transaction.
In the meantime, the sector must keep its blinkers off, eyes open and be brave enough to continue to innovate.
Richard Taylor
,
Investment Director,
Business Growth Fund
While there has been recent volatility following Pure Gym’s aborted IPO, we don’t believe this volatility reflects the market as a whole. As investors in both Xercise4Less at the low-cost end of the fitness market, and Gymbox at the premium end, we view this sector positively and welcome innovations.
It’s an attractive market, especially at the budget end, and there’s still potential for more gyms in the UK. However, it’s becoming an increasingly polarised market and those clubs stuck in the middle face a challenge and need to be well differentiated in order to stay interesting.
One of the concerns is at what point the market will become saturated, but as the budget market has doubled in terms of gym numbers within three years, these concerns are starting to dissipate. With regards to staying favourable to the investment community, the industry needs to stay differentiated, observe trends overseas to stay relevant and bring in the latest concepts. There are interesting developments in the US, with super budget gyms bringing the price point even lower, so it will be interesting to see if that’s also the case here. What gyms mustn’t do is become stale or conservative.
"It’s an attractive market, especially at the budget end, and there’s still potential for more gyms in the UK" – Richard Taylor
David Bains,
Investment director,
LDC
I really like this sector – it’s full of likeable, glass-half-full people with a passion for what they’re doing. We like the dynamics of the sector and are actively seeking investment opportunities in this space.
Pure Gym’s aborted IPO won’t have a negative impact; we see this as a post-Brexit, UK stock market issue. That said, there’s still some scepticism among the investment community as a result of investors losing money on fitness operators in the past, including Fitness First, Esporta and LA fitness.
However, confidence is slowly returning thanks to success stories like Pure Gym, Gymbox and The Gym Group. Furthermore, the investment community has bought into the health and wellness trend, so there’s also a lot of interest in all the ancillary companies such as food and beverage, clothing and apps.
Going forward, I think there will be further consolidation, particularly in the mid-market, with private equity creating a healthy M&A environment for premium, low-cost or boutique deals.
Before parting with their cash, investors will be watching closely to see how quickly health and fitness companies are expanding, whether there’s sufficient demand in the locations they’re choosing, if they’re signing sensible rental deals and if they’re continuing to invest in their kit to maintain quality. If these are all in place, then companies will find themselves with the ability to raise capital and grow faster.
"Pure Gym’s aborted IPO won’t have a negative impact: we see this as a post-Brexit, UK stock market issue" – David Bains
Matt Merrick,
Director,
Stretchtone Advisory
Brexit scuppered Pure Gym’s first launch and market conditions for new IPOs haven’t changed very much. A number of other organisations were looking to IPO in the second half of 2016, but the market has been flat in comparison to 2014/15. Nevertheless, the investment community certainly has a positive view of the sector and is excited by the macro trends and potential value creation, especially at the venture capital end.
That said, the fitness sector is not as mature as, say, retail and hospitality. Steps must be taken to become more focused and transparent, as there are a lot of good stories which go unnoticed. This generation of leaders are more open to collaboration and cross-sector data sharing than earlier generations – and this is important for investor understanding and trust – but more needs to be done.
The middle ground is oversupplied, so I think we’re set for more consolidation in the UK – as in fact we’ve already seen with Pure Gym acquiring LA fitness, and DW and Fitness First partnering up. I also think there will be more considered investment at the top and bottom, in premium and low-cost clubs.
However, with greater saturation and tighter controls on capital, investment in bricks and mortar will likely slow down and we’ll see established and new operators investing in virtual memberships, using the power of digital to develop their brands.
"Steps must be taken to become more focused and transparent, as there are a lot of good stories which go unnoticed" – Matt Merrick
Wyn Ellis,
Director of leisure and travel research,
Numis Securitie
The health and fitness sector is viewed positively by the investment community and this will continue to be the case, provided the low-cost two market leaders – Pure Gym and The Gym Group – keep delivering such strong returns and expanding at a healthy rate.
The sector is backed up by trends showing an increasing focus on health, fitness and wellness, especially among Millennials, and this is leading to a growth in memberships and market penetration: the attractive low-cost, flexible membership schemes offered by the low-cost segment are helping to expand the market.
However, there are some concerns. The barriers to entering the marketplace are not considered to be that high, and if more players come into the sector, it might impact the returns and expansion of Pure Gym and The Gym Group. However, these barriers are rising as these two operators gain in scale and are able to buy effectively to bring down costs. There have also been fears that the 30 per cent-plus returns are not sustainable, but as they’ve managed to deliver these for several years, these fears are also lessening.
The investment community had some issues with Pure Gym’s acquisition of LA fitness, as the latter were mid-tier gyms with a different business model based on relatively high monthly charges and relatively low membership numbers. Pure Gym now has the challenge of turning those health clubs around and adapting the model, and the jury is out on whether or not it will make a success of the acquisition.
Whether people will cut back on their memberships if there’s an economic downturn is another issue. However, one view is that people would simply trade down to cheaper memberships, which will further benefit low-cost operators.
