The collapse of LeisureNet has only highlighted problems that have long been characteristic of an image-driven industry David Le Page Hard-selling, quick fixes and steroids. That’s the eternal tale of the fitness industry, which encapsulates the recent downfall of LeisureNet, custodians through the Health & Racquet Club (H&RC) group to many of the nation’s less flabby bodies. At any rate, the company’s collapse has highlighted the potential for a massive gulf between shareholders’ perception of a company and the chilling figures lurking in its books. Now the damage control is under way, and the corporate vultures have flocked to an unusually appealing corpse. An early premonition of LeisureNet’s readiness to overreach itself was the collapse of its first effort to go international – in 1994 it closed the last of several H&RCs opened in the United Kingdom in the 1980s. The H&RC is its largest South African asset. But putting such setbacks aside, by the beginning of this year the group had conquered the South African market, effectively ceasing development of new H&RCs.
Most existing clubs were maturing past the typical two-year period of initial unprofitability. Money was pouring in at a healthy pace, but management needed to find new opportunities for the growth shareholders demand.
With no fewer than 85 gyms and close to a million members, local expansion had reached something of a plateau. Despite a share price decline to around 300c at the end of last year, LeisureNet appeared to be extremely healthy, posting headline earnings of R109,5-million on turnover of R1,17-billion. Under joint CEOs Peter Gardener and Rod Mitchell, the company had embarked on an ambitious programme of international expansion through Healthland. Based in Malta, Healthland was rapidly growing interests in Australia, Austria, France, New Zealand, Spain, Switzerland and the UK. LeisureNet had similar shares in a handful of smaller German and Australian entities, as well as a 50% share in local Imax licence holder Millennium Expotainment. But the expansion was driven by corporate steroids – the underlying capital was not there to support the leases Gardener and Mitchell were signing for new gyms in Europe and the UK. Despite this, the hard sell persisted. The 1999 annual report trumpeted the investment by United States insurance company American International Group Inc of R175-million in Healthland. Inexplicably, though, driven perhaps by bad judgement or excessive confidence, Gardener and Mitchell chose to take on 100% of the liability for Healthland’s various debts – even though LeisureNet is but a 57,8% shareholder in Healthland. At the end of March, the flagging share price abruptly leapt 40%. LeisureNet appeared to have successfully flexed its glistening quads at Fitness Holdings of the US. A rapidly expanding company which now runs 417 gyms worldwide, it seemed on the verge of making an offer for LeisureNet at around R5 a share. A week later, the excitement was extinguished by the withdrawal of a cautionary (notice of possible share price volatility). Gardener subsequently denied that any offers had been received. But Dr Iqbal Surv, CEO of Sekunjalo Holdings, an 18% empowerment shareholder in LeisureNet, said there had been various offers higher than the then share price. The offers, considered to undervalue LeisureNet, were declined. The confidence that led Surv and LeisureNet to turn down the Fitness Holdings offer appears to have been based on a belief in the possibilities of further international expansion. Behind the scenes, signs that trouble was afoot were already apparent from the arrival in August of corporate troubleshooter Peter Flack of Coronation FRM, who was appointed acting CEO. The warning signals continued when the Fitness Holdings deal abruptly fell through, and Healthland entered negotiations with Virgin Active Holdings of the UK on October 4. LeisureNet was by now trading at just 70c. That the company was in fact desperate for cash was confirmed two days later when Virgin Active dropped the deal. LeisureNet, saying it was unable to meet the demands of Healthland creditors, filed for provisional liquidation on Saturday October 7. Trading in LeisureNet was halted at 20c a share. The LeisureNet juggling act – taking leases while selling shares – was stopped in its tracks. Crisis immediately hit Sekunjalo. Five board members resigned after Surv refused to step down over the LeisureNet debacle – Sekunjalo had spent R105-million for its chunk of LeisureNet. As the dust settles, what remains? On liquidation, LeisureNet’s debt stood at well over R300-million, R130-million of that owed to Nedcor, the largest creditor. Nedcor is now in negotiations with Imax and may buy LeisureNet’s 50% share of Millennium Expotainment. According to Paul Bondi of Nedcor Investment Bank (NIB), contracted to advise the liquidators, the H&RC’s new owners will almost certainly honour current membership contracts as the membership base constitutes one of the gym group’s major assets. Bondi believes there are a number of opportunities for the H&RC to get better value out of its existing resources. Many of the gyms are not owned by the group, but leased at rates that guarantee healthy incomes to landlords. Some of these leases could be renegotiated. The 930 000 H&RC members together make for an incredibly valuable database of South Africa’s well-to-do and up-and-comers. In the age of “customer relationship marketing”, this database is considered also an extremely valuable asset. Members, expect more junk mail. Another opportunity for increasing income could be restructuring the incentives paid to the group’s sales force. Of the 40 or so potential buyers, Bondi says NIB hopes to end up with a shortlist of five exceptionally high-quality candidates by Friday next week. More would be difficult to manage through the due diligence process which will last seven days, during which candidates will be able to peruse all company documentation and pose questions to management. Though some health industry insiders are sceptical about the ability of any purchasers to make money in a saturated market while carrying existing contract holders, Bondi points out that most H&RC members appear to be on two-year contracts. Only 8% of contracts are of the 40-year “lifetime” type. At least 75 000 of the 930 000 H&RC members are contracted through medical scheme Discovery Health’s Vitality fitness plan. Vitality’s Johan van Rooyen would not divulge details of Discovery’s contract with H&RC, but did say it provides for a steady stream of income to H&RC. This adds up to “multiples” of the seemingly minimal R200 it costs Vitality members to join H&RC. Despite this, the publicly available figures strongly suggest that with this contract H&RC sent another powerful blast firmly through its own foot.
Possible buyers, according to the Financial Mail, include Venfin/Rembrandt, Virgin Active, Fitness Holdings, Sekunjalo Investments, Ethos Private Capital, Coronation Capital and LeisureNet founders Rod Mitchell and Peter Gardener. By next Friday, NIB should be able to reveal the final contenders. The German, Spanish and Italian components of Healthland have already been sold off, and the Australian liquidators have disposed of a couple of clubs. Sekunjalo has been left desperately trying to claw back some credibility both for itself and for the empowerment process. Its share price plunged to 10c on the news of liquidation but has now recovered slightly, touching 24c on Wednesday. Mitchell and Gardener resigned recently from LeisureNet. Should they succeed in purchasing H&RC, shareholders are likely to be extremely angry. For they will have profited from their errors, the errors that have probably destroyed all remaining shareholder value in LeisureNet. The eventual buyers will end up doing business in an industry very different to that which spawned H&RC. But it should be one in which the long-term fitness of gyms – and their members – is more assured. H&RC CEO Richard Day did not respond to Mail & Guardian requests for comment.