Halabi exercises rescue plan for Esporta

Simon Halabi, a Syrian-born property investor whose Halabi family trust’s £2.5bn (US$5bn) London portfolio includes a one-third stake in the Shard of Glass building, is reportedly planning to buy back Esporta, the gym chain he bought from private equity firm Duke Street Capital last November and whose holding companies went into administration in August of this year.

According to reports over the weekend, Halabi is currently putting together a consortium comprising Société Générale, the bank which ploughed £330m into a £460m buyout of the gym chain, and unnamed specialist mezzanine funds.

The Sunday Times said that Halabi had already held talks with investors, but these had broken down due to lack of contact with Grant Thornton, the accountancy firm running Esporta since Halabi’s holding companies Bell I and Bell II went into administration, and because the mezzanine funds wanted a higher rate of interest than Halabi was wiling to pay.

The Times said that a buyback would involve an equity injection from Halabi, a quasi-equity tranche from mezzanine funds in the form of debt, while Société Générale would keep its investment but write off some of the debt. The report added that it was unclear whether Halabi would pay back a £70m vendor loan from Duke Street Capital and the same from Société Générale incurred in the original buyout. It is unclear how the £70m from Société Générale relates to its £330m loan and previous reports suggest that Duke Street only provided a £30m vendor loan to Halabi.

Duke Street Capital has repeatedly declined to comment on Esporta. The London-based private equity firm bought an 80% stake in Berkshire-based Esporta for £144m in July 2002, merging it several months later with Invicta Leisure, a £140m purchase. The firm carried out two refinancings – of £155m and £306.2m respectively – before selling it to Halabi in November 2006. Halabi reported faced off against at least 10 other bidders in the auction and is understood to have paid at least £25m more than the nearest rival offer.

The gym sector has attracted plenty of interest from both private equity and trade buyers despite the sector experiencing significant problems. Two weeks ago, Royal Bank of Scotland and PPM Capital, the private equity arm of Prudential currently in the process of spinning out from its insurance giant parent, sold Cannons to Nuffield Hospitals, a charitable organisation that runs hospitals, diagnostic services and employee health schemes, for £170m.

A Hawkpoint-run sale lasted for more than a year and, despite initial speculation of a £300m price-tag dropping to as low as £70m earlier this year, the higher figure would still have been a significant loss on the £360m RBS and PPM Capital paid for Cannons in 2001.

LA Fitness was one of those expected to put in a bid for Cannons. The health club operator was acquired by London and New York-based MidOceanPartners for approximately £150m in 2005. The year before that, Legal & General Ventures acquired Total Fitness for £80m, 12 months after Permira and Bridgepoint kicked off private equity’s run on the sector with a £210m public-to-private of Holmes Places. The same year, Cinven purchased Fitness First for £204m.

Holmes Places was largely sold off in two parts in 2005 and 2006: the Holmes Place Iberia arm was sold to Spanish mid-market firms Mercapital and Nmas1 and Portugal’s Explorer Investments for €110m before Virgin Active purchased the UK arm in a deal that valued the enlarged group at £650m. Bridgepoint and Permira kept stakes of approximately 15%, while also retaining majority interests in Holmes Place’s European business, which includes clubs in Germany, Switzerland and Austria.

Property investor London & Regional has also been an acquirer of gym assets: in May 2006 it bought Next Generation Clubs for £197.5 with financing from Bank of Scotland Integrated Finance; in May 2007, it purchased David Lloyd Leisure for £925m. The business then went on to merge the two assets.

As city executives consider shedding the pounds on the treadmills after a Christmas blowout, some of their peers will be re-examining the prudence or otherwise of bulking up on gym chain assets as part of their New Year resolutions.

By Robert Venes