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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION 596/2014 (“MAR”).
13 June 2018
The Gym Group Plc
(““TGG” or “the Company”)
Strong trading,
Proposed acquisition of 13 gyms from easyGym and
Proposed Equity Placing to raise £24 million
The Gym Group (“TGG”), the fast growing, nationwide operator of 133 low-cost gyms, announces a trading update for the five months to 31 May 2018. Trading for the first five months of the year has continued to be strong and has met the Board’s expectations. Total membership is up 31.8% to 668,000 (May 2017: 507,000) and LIVE IT., our premium pricing initiative, has signed up 45,000 members in our first seven months of rollout.
Furthermore, TGG announces its intention to acquire 13 gyms from easyGym (the “Acquisition”) for an initial cash consideration of £20.6 million, with an additional £4.1 million payable when lease extensions are agreed on two sites.
The acquisition will be part-funded by an equity placing being launched today which is intended to raise gross proceeds of £24 million gross of expenses (“the Placing”) and from the Company’s banking facilities which will be extended by £10 million as part of the transaction. The Acquisition is expected to complete on or before 20th July 2018.
TGG has grown rapidly since the opening of its first site in Hounslow in 2008 and has become the fastest growing operator in the low-cost gym market. Our growth comes from a combination of our organic rollout programme and from opportunistic acquisitions such as the purchase of the Fitness First Clubs in 2016 (4 sites) and the Lifestyle Fitness Clubs in 2017 (18 sites).
Current trading
Current trading for the first five months of the year has met the Board’s expectations and we expect to meet market expectations in 2018:
- Six new gyms will have opened by the end of the first half increasing the total estate to 134 sites
- The sites opened to date are at Sutton Coldfield, Birmingham Perry Barr, Nottingham Sherwood, Stockport and Manchester Fallowfields. Encouragingly, the sites opened in 2018 are trading strongly.
- Total members at 31 May 2018 of 668,000, up 31.8% versus May 2017 (31 May 2017: 507,000)
- The conversion of the Lifestyle sites is proceeding according to the timeline set out at the time of the Full Year Results and we are seeing strong member uplifts in the sites where the full TGG model has been implemented :
- Currently 9 sites have been converted to the TGG brand with a further 3 on site for conversion.
- Plans are in place for the remaining 6 sites to be converted by the end of September 2018.
- LIVE IT., our premium pricing initiative, is performing strongly following the rollout across the estate that completed in May 2018:
- At 31 May 2018, 45,000 members had signed up to LIVE IT. representing 6.7% of the closing membership.
- As anticipated the highest take-up of LIVE IT. is from new members and as expected LIVE IT. has impacted existing revenue streams (multi-site, twin, joining fee).
- The new personal trainer operating model trial has been extended to 8 sites encompassing both new sites and existing sites and is operating according to our expectations.
- Plan to extend the trial to two further regions in the summer and then we will make the decision to rollout on a phased basis across the entire estate based on the results of all the trials.
- The pipeline continues to be strong for the remainder of 2018 and is building according to our expectations for 2019:
- Currently have a further 15 sites exchanged for 2018 and 2019.
- Reiterate our guidance that we expect to open within our expected range of 15 to 20 organic openings for the full year.
The Acquisition
The Board believes that the Acquisition has a compelling strategic and financial rationale which is outlined below.
- Strategic rationale:
- Eight of the 13 sites are located within London and this diversifies the geographical mix in this fast developing part of the country.
- The acquisition of the easyGym sites will add to TGG’s existing rollout plans for 2018 and help drive future growth:
- opportunity to increase member numbers closer to TGG mature estate levels (average easyGym 4,850 vs TGG 5,477) through focus on TGG member service proposition and further investment into the facilities;
- roll-out of LIVE IT. multi-site membership proposition to easyGym members; and
- economies of scale from utilising TGG’s existing infrastructure.
- Acquisition further underpins TGG’s aim to reach 200 sites by 2020.
- Financial rationale
- Well-invested sites requiring limited cost to rebrand (c. £0.28 million per site).
- The 13 sites being acquired earned site EBITDA (excluding central costs) of £4.3 million in the 12 months to 31 March 2018 with revenues of £12.9 million.
- Acquisition multiple of 5.7x LTM Mar-18 Site EBITDA.
- Upfront and deferred consideration deal structure ensures that TGG does not overpay for assets.
- The post-transaction structure will represent opening leverage of 1.2x(1) combined 2017 TGG EBITDA and easyGym LTM Mar-18 EBITDA of £32.3million.
- The Acquisition on a standalone basis is expected to be earnings enhancing in 2019
It is the intention that 11 sites will be converted to The Gym brand following assignment of the leases. The two sites requiring lease extensions will have the right to continue to use the easyGym brand. It is anticipated that post conversion maturity will be reached in a shorter timeframe than a new build (average for organic opening of 24 months). In addition, each conversion is expected to cost £275,000, a lower cost than the Lifestyle refurbishment cost per gym of £470,000. As with the Lifestyle acquisition we are targeting 20%+ return on capital at maturity on the easyGym transaction. Staff will also transfer to TGG and easyGym will support the integration of the sites through a Transitional Services Agreement (“TSA”). Completion of the Acquisition is conditional upon, among other things, completion of the Placing.
The Placing
The Company today announces its intention to undertake an equity placing of new ordinary shares of 0.01 pence each in the Capital of the Company (the “Placing Shares” and the “Placing”). The Placing is intended to raise gross proceeds of £24 million (before expenses).
The proceeds of the Placing will be used to part-fund the Company’s proposed acquisition, with the balance of the Consideration to be funded from the Company’s existing banking facilities which have been extended as part of the Acquisition.
The Placing is not conditional upon completion of the Acquisition. In the event that the Placing completes, but the Acquisition does not complete, the Company will retain the net proceeds of the Placing for potential investment opportunities and general corporate purposes.
The Placing will allow the Group to maintain a strong balance sheet.
Outlook
The Board is pleased with underlying business performance and expects that a combination of the strong uptake from LIVE IT. and the easyGym acquisition will be materially earnings enhancing in 2019 and beyond.
John Treharne, CEO of The Gym Group, commented:
We are pleased to have reported another strong period of growth. Our increasing membership level shows the attraction of our business model whilst the sites that we have opened in H1 2018 are trading well. Since completing the rollout, our LIVE IT. initiative has had a very encouraging take-up. The easyGym portfolio of 13 well invested gyms is highly complementary to our existing estate. We are confident they will integrate quickly and easily into our existing business. In addition, they will further enhance our market position in the low cost market in London, as well as extending our geographic spread across the UK. We have a significant opportunity to increase each gym’s membership through focus on member service, investment into the facilities and through offering our premium pricing proposition, LIVE IT., to more members. This acquisition accelerates our expansion plans for 2018 as we advance towards our goal of 200 gyms by 2020.
For further information, please contact
The Gym Group
John Treharne, CEO
Richard Darwin, CFO
via Instinctif
Numis (Financial Adviser and Broker)
Oliver Cardigan
Toby Adcock
Alasdair Abram
020 7260 1000
Instinctif
Matthew Smallwood
Justine Warren
0207 457 2020
(1) Net debt of £38.6 million calculated from a combination of TGG’s ending FY17 net debt (£37.5 million) and the incremental debt (£1.1 million) that will be drawn down following completion of the Acquisition for conversion capex.
For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this Announcement is being made on behalf of the Company by Richard Darwin.
This Announcement should be read in its entirety. In particular, you should read and understand the information provided in the "Important Notices" section below and the Appendix to this Announcement (which forms part of this Announcement) which sets out the terms and conditions of the Placing. Persons who have chosen to participate in the Placing, by making an oral or written offer to acquire Placing Shares, will be deemed to have read and understood this Announcement in its entirety (including the Appendix) and to be making such offer on the terms and subject to the conditions herein, and to be providing the representations, warranties, agreements, confirmations, acknowledgements and undertakings contained in the Appendix.