Deal in focus: NorthEdge's purchase of Total Fitness sees company return to rude health

Alice Murray
07 April 2015

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Last week, NorthEdge Capital invested ТЃ11.5m to support the management buyout of Total Fitness. Alice Murray looks back at the deal, which marks a successful turnaround led by RooGreen Ventures

Last week's deal saw existing investor RooGreen partially exiting the business as well as reinvesting. RooGreen had been brought into Total Fitness by the company's lenders back in 2012 and was tasked with three key objectives: to facilitate the company's turnaround; to restructure its management team; and to find an exit for the banks.

Total Fitness's history is not hugely surprising given the challenges many private equity firms have faced from pre-crash deals in the leisure sector. Founded in the 1990s, when the gym industry was growing very quickly, Total Fitness was acquired by LGV Capital through a buyout in 2004. It is understood LGV paid around £80m for the business and a significant amount of debt was used to finance the deal. At this time, the company was operating 21 health clubs.

As has been the case with other investments in this sector, the going got tough during the financial downturn as consumer spend dwindled and gym membership fell away. Total Fitness was unable to stay in the black due to cripplingly high property costs.

It was reported that LGV had lost around £90m on its investment following a pre-pack administration process in October 2010, which saw turnaround specialist Graham Hallworth and Barclays Ventures acquire the company for £11.9m. Furthermore, the company's lenders lost £9.8m.

Over the following two years Total Fitness saw membership numbers stabilise, as well as a slight uptick in average membership fees. However, the company was still reporting a loss of £4.7m on revenues of £46.3m in 2012 and had reduced the number clubs it operated from 21 to 16.

Picking up the pace
It was at this point that Total Fitness's lenders, in a bid to speed up the turnaround process, brought in RooGreen founders Warwick Ley (previously of Endless) and Brian Davidson (former CEO of Crown Paints) to lead the operation.

One of RooGreen's first moves was to bring in new CEO Richard Millman, who had previously led the turnaround of Leisure Connection as CEO. Millman's former roles include senior positions at Dixons and Coca-Cola. RooGreen also invested in Total Fitness to drive the continued turnaround.

Total Fitness opened a new club in Wrexham at the start of April 2015, marking the company's first new club opening in a decade and bringing total site numbers back up to 17.

According to Ley, RooGreen contacted NorthEdge off-market. "Our strategy beyond driving the turnaround was to develop an attractive exit strategy for the banks and in this respect, an MBO with the backing of the NorthEdge team was a great win-win outcome for all concerned," he says.

Ray Stenton, the partner who led the deal for NorthEdge, says: "Warwick and Brian did a great job in turning the business around and they approached us because they needed a new funding partner."

Following NorthEdge's entrance to the business, Total Fitness will benefit from a large capital expansion plan, which will see around £6m invested over the next two years. For NorthEdge, the focus now is on changing the business's perspective. "We want to help the team look at the business differently; it is no longer a turnaround," says Stenton.

Both Stenton and Ley are aware the gym sector remains tough, but they believe Total Fitness has found its own corner from which to operate. "It is still a market with challenges," says Ley. "There has been a real polarisation in the market and the value end is still far from maturing, with new players such as Sports Direct coming in. However, Total Fitness positions itself more towards the full service offering end and there is an attractive and growing market in that space."

Says Stenton: "Total Fitness has a unique offering; it operates the largest clubs in the north, which feature swimming pools, free weights and class suites. The breadth of its offering is highly differentiated and it is holding up against the value players."