Deal focus: GPs target healthy scale

When Navis Capital Partners bought gym operator Celebrity Fitness in 2007, Fitness First soon became the giant it wanted to topple. The private equity firm invested about $40 million in Celebrity Fitness and has helped the business grow from fewer than 20 gyms and a predominantly Indonesian footprint to 62 across Southeast Asia. Over the past 10 years it has supplanted Fitness First as market leader in Malaysia and widened the gap between the two operators in Indonesia.

“We thought we could outcompete them because they were part of a leveraged buyout,” says Nick Bloy, managing partner at Navis. “All of the cash being generated by Fitness First in Asia was being sucked up to pay down debt at the holding company level, so the local guys didn’t have money to spend on capex.”

BC Partners had bought the global Fitness First business in 2005 only to see it hit hard by the global financial crisis. The company duly succumbed and its creditors, led by Oaktree Capital Management, completed a debt-for-equity swap worth around GBP565 million in 2012. Navis and Oaktree first discussed a merger the following year – and nearly four years on, it has finally come to fruition.

Any deal was contingent on the Fitness First business being broken up into its constituent geographical parts, and Oaktree didn’t want to act immediately. However, after the Australia operation was sold last year, progress could be made in Southeast Asia. Fitness First has 90 clubs in Singapore, Malaysia, Indonesia, Thailand, the Philippines and Hong Kong, with 220,000 members and $219 million in annual revenue. Combining with Celebrity Fitness – which covers Singapore as well as Indonesia and Malaysia, and has 178,000 members and $76 million in revenue – will create a business more than five times the size of its nearest rival.

“This is an industry that rewards scale: landlords want you in their malls, not someone with a weak balance sheet; if someone wants to introduce a new fitness concept, you are the go-to person because you have 400,000 members,” he adds. “So far we’ve tripled the value of our equity in Celebrity Fitness. I feel we can double it again, and fairly quickly because of the synergies.”

Ownership of the combined entity, known as Evolution Wellness, will be split 60-40 between Oaktree and Navis, but they will have joint control. An exit is likely in 2019 or 2020: by that point the company is expected to have EBITDA of close to $100 million, which would make it an attractive listing target. Between now and then the plan is to pursue further growth in Southeast Asia, where gym membership penetration is just 4.2% compared to 14.8% in Australia.

“Sometimes you are in a business that is a very steady compounder but remains very immature,” Bloy says. “Thailand, the Philippines and Indonesia have big populations and we have barely tackled any of the secondary cities.”

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• Topics
• Southeast Asia
• Consumer
• Expansion
• Southeast Asia
• Hong Kong (China)
• Navis Management
• Oaktree Capital
• M&A
• Growth capital