Pure Gym Memo 040620
- Understand Pure Gym’s FCF break-even sensitivity to gym member numbers (given scenarios for ARPM and other variables including potential landlord rent concessions) post re-opening of its gyms and loss of temporary COVID-19 cost benefits
- Understand why various external survey and other data points, as well as Pure Gym’s own disclosures, suggest that the % of its Q1 20 peak gym members that Pure Gym may re-open with could cause a liquidity break as early as Q3 / Q4 20 in our bear case or even Q4 20 in our base case unless the RCF covenant (which effectively constrains Pure Gym’s usable liquidity) is waived
- Understand why there is a material risk that the c. 20% growth in UK gym memberships over 2015 – 2019 (of which Pure Gym and The Gym Group have accounted for most) gets reversed post re-opening following COVID-19
- Understand why, given the vulnerable liquidity positions of the UK’s two largest gym operators, there is a material risk of a grab for members and price war on re-opening, where the ”winner(s)” face lower pricing / ARPM and the “loser(s)” experience revenue pressure (and potentially unsustainable resulting EBITDA / FCF / liquidity / leverage) from both lower gym members and lower pricing
- Understand how, based on its customer value proposition and cost structure / business model, Pure Gym, pre-COVID-19, was a decent business, earning a 10 year unleveraged IRR of 25% on its new gyms and generating steady state (leveraged) FCF of c. 10-12% of net debt each year
- Understand potential solutions to liquidity shortfalls in our base case – involving LGP and landlords (turnover leases) amongst others, that could take advantage of Pure Gym’s Credit Facilities and general debt baskets, if acted on quickly
- Understand why base case Senior Secured Notes (SSNs) recovery could be down at c. 40 cents and negligible in the bear case
- Understand how landlords can best structure any renegotiated rent, possibly to the detriment of the SSNs
- Detailed financial projections (including of liquidity by quarter) and assumptions across base, bear and bull cases with country level modelling of ARPM, average gym members per club, average gym member numbers, net club openings and granular cost variability factors applied to cost lines
- Survey and other external data points to guide the potential % of Q1 20 peak gym memberships that remain on re-opening / un-freezing of memberships
- Comparison of Pure Gym and The Gym Group and assessment of which has better survival prospects / liquidity options
- Identification of potential SSNs Indenture weaknesses following the Fitness World acquisition
- Steady state FCF methodological framework and estimation
- Estimation of new gym IRRs and why Pure Gym pre-COVID-19 was a decent business and could be again
- Estimation of extent of temporary benefits in Pure Gym’s disclosed weekly cash burn rate, reconciliation to the financial statements and of how management likely arrives at its Q1 20 call comments on its break-even member numbers
- What data is there to guide the % of Q1 20 peak gym members Pure Gym will likely retain at re-opening once frozen memberships are turned to paying?
- What combinations of gym member numbers, ARPM and rent concessions does Pure Gym need post the re-opening of its gyms to achieve sustainable liquidity and leverage trajectories?
- Who has better liquidity options, Pure Gym or The Gym Group?
- Will consumers trade down from the mid-market private and public gyms to value gym operators or will they be more focused on using gyms with less crowding / more availability of booking slots post COVID-19?
- What potential solutions could there be to our base case (though not to our bear case)?
- View, Variant Perception & Recommendation
- Business Overview & Analysis
- Industry Overview
- COVID-19. Disruptors Get Disrupted
- Historic Financials Analysis
- Financial Projections & Valuation – Base Case
- Financial Projections & Valuation – Bear Case
- Financial Projections & Valuation – Bull Case
- Indenture Analysis
Appendix 1 – Fitness World Acquisition
The Gym Group Plc