Esporta recap paves way for deals

In anticipation of the next round of consolidation in the UK health and fitness clubs business, Duke Street-owned Esporta has announced a £306m refinancing, which was arranged and underwritten by Bank of Scotland. As well as paying the sponsors a dividend of about £115m, the deal gives the company greater flexibility to compete in the next round of consolidation.

Esporta has made no secret of the fact that it will be a bidder for Next Generation, which recently hired UBS to conduct a strategic review. The 14-club chain is thought to be valued at £150m, but could be followed by the divestment of Whitbread’s much larger David Lloyd business, which would fetch about £550m.

Unusually for a fitness club business, the refinancing of Esporta has been structured with an internal separation between the opco and propco. Senior debt of £147m has been secured against the underlying property assets, while a £93m, multi-tranche, senior loan has been secured against cashflow.

According to Simon Tilley, who worked on the deal for the debt advisory group at Close Brothers, the structure will facilitate potential further acquisitions.

“The new structure will make it easier to integrate future assets and raise debt against them,” he said. “In these situations, vendors want certainty of funding, and this structure enables banks to quickly issue support letters and get through to final documentation.”

Following the successful disposal of its loss-making European health and fitness operation in the summer of 2005, Esporta has had a considerable change in fortunes. The group announced like-for-like sales growth of 3.6 % in 2005, an Ebitda increase of 10% to £38.3m and a member retention improvement of 2.5 percentage points.

Next Generation was established in 1996 by David Lloyd, with son Scott as CEO, after Lloyd’s sale of David Lloyd Leisure to Whitbread for about £200m in 1995.

The family is thought to own around 10% of the business, with a group of high net worth Irish investors, John Magnier, JP McManus, Dermot Desmond and Michael Tabor, holding a 60% stake. Brewer Scottish & Newcastle owns 15% of the business.

Whitbread is also currently being tipped by many as a break-up target, with David Lloyd seen as the natural first disposal. The ousting of Stewart Miller as managing director of the business last year also prompted fresh speculation about the future of the group.

Competition in the space is likely to be frantic as private equity firms, property players and trade buyers all tussle to control the next round of consolidation.