A fitness test for investors

Given the burnt fingers suffered by investors the last time that health and fitness became a stock market darling, there has been understandable scepticism at the announcement that PureGym will be joining The Gym Group on the IPO treadmill next month.

In the mid-1990s the likes of Fitness First and LA Fitness set the flotation ball rolling and operators including Holmes Place, Cannons, Esporta, Topnotch and Lady in Leisure rushed to join the stock market bonanza. However, in less than a decade the sector had run out of puff and in 2005 LA Fitness became the final fitness operator to quit the quoted arena in a £140 million buyout.

The period since has been no less painful as the huge debts taken on to finance the public-to-private deals sparked a redrawing of the health and fitness landscape through financial restructurings, takeovers and break-ups.

It was out of this sweaty mess that both PureGym and The Gym Group were born in 2008. Whereas the established operators were still wrestling with a legacy of over-rented and under-invested premises, as well as the thorny issue of complex contracts that appeared designed to tie in increasingly disgruntled members, the low-cost duo offered a cheap and modern concept with a flexible and uncomplicated monthly membership system. As well as offering cheap fees, both operators have 24-hour opening for many of their venues, opening them up to a whole new audience.

PureGym has yet to reveal its target market value, but with 167 clubs, double the number of its rival, which is valued at about £290 million, it is likely to be worth as much as £600 million. Of the £190 million it is raising in new money, the majority will be used to cut its estimated £200 million debt to about £50 million.

The share price performance of The Gym Group since it floated in November at 195p should provide comfort. Having jumped to 274p in May, it was rocked by the Brexit vote, slipping to 180p, but has since bounced back above the float price. Assuming that investors can overcome any prejudices to the sector caused by the woes of the past, the question becomes whether to invest in The Gym Group or PureGym.

In truth, they have very similar models, with the big difference being size. Scale certainly brings benefits, not least in negotiations over purchasing equipment and securing new sites.

Given the wall hit by the quoted fitness sector first time around, it is pertinent to ask whether market maturity is a looming problem. PureGym, opening up to 30 sites a year, reckons there is scope for the low-cost market to grow from 450 at present to about 950. There are also likely to be further opportunities to swallow weaker rivals. Beyond that, the obvious move is overseas.

Assuming that PureGym gets its float away, the likelihood is that low-cost rivals including Xercise4Less and Energie will follow suit, perhaps next year. Meanwhile, Bannatyne Group is expected to dust off plans for a £300 million flotation. There is a danger that such IPOs might give the investment community a fresh bout of indigestion, but for now The Gym Group and PureGym are looking in peak fitness.

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