Wiese’s pumping iron
The retail magnate has poured R1bn into Brait’s Virgin Active. Should retail investors follow suit?
Retail tycoon Christo Wiese, who took a serious beating on Steinhoff International, has made his first significant new investment in about four years by pumping more than R1bn (£50m) directly into fitness chain Virgin Active.
Virgin Active is controlled by investment company Brait, where Wiese is also the largest investor. That might have been perceived as a positive for Virgin Active, which is trying to work its way back to 2019’s earnings before interest, tax, depreciation and amortisation (ebitda) figure of £140m (R2.8bn).
Virgin took a body blow from Covid, which may have altered exercise regimes forever. But, says Wiese, it remains a fantastic business.
“I still believe it has the potential to become one of the biggest gym and health operations in the world,” he says. “We are entering a postpandemic fitness and health environment. Virgin Active’s new management team has some great ideas … If all the plans come to fruition, Virgin Active will be a business that trades on a substantial ebitda multiple.”
The market’s not buying it — at least, not yet. On Monday Brait gave up about R1.2bn in market value. This may have less to do with big changes at Virgin Active and more to do with the impact of soaring soft commodity prices (especially wheat) on the input costs of the investment group’s other big investment, in food group Premier.
But Virgin Active still represents a serious chunk of Brait’s intrinsic value. The latest shifts to bulk up and diversify the business into a wellness hub might also change investor perceptions around how value will be unlocked.
For the most part, and particularly since Brait has signalled its intention to list Premier this year, investors might have expected Virgin Active to be sold to another large international fitness chain operation. But with Brait (along with Wiese and other new investors) investing £88m into Virgin Active, it would seem more likely that a new-look wellness business is to be listed on a global bourse.
Coupled to the latest funding tranche is a deal that will see Virgin Active merging with Real Foods in a £28.6m deal, via an exchange of shares. Real Foods, founded by Dean Kowarski, is best known for the Kauai health food outlets located in more than 100 Virgin Active gyms. Kowarski will also become CEO of the enlarged Virgin Active group, and is investing £18m into the mix as part of the DK consortium.
Older investors might recall, with trepidation,
Christo Wiese
a slightly similar shift by LeisureNet — the former (and defunct) owner of Virgin Active’s previous iteration, the Health & Racquet Club.
LeisureNet, too, made a play for selected food outlets (as well as private education) when it bought brands including Black Steer, Max Frango’s and Bulldogs Pubs (none of them exactly health food inclined). LeisureNet also saw merit in an enlarged lifestyle play, but this never panned out. Hopefully this time it will be different. The existing relationship between
Virgin Active and Real
Foods does offer some comfort, not to mention synergies.
Brait CEO Peter
Hayward-Butt says that with enough growth capital on hand, the aim is to create a “holistic” wellness group.
Of course, Wiese’s sizable investment is significant. And after the Steinhoff ravages, you imagine the retail tycoon’s larger commitments would be carefully thought out.
Hayward-Butt says Wiese has been a most supportive investor around Virgin Active. “He knows the business very well.”
So should investors interpret Wiese’s R1bn
investment as a sign that Virgin Active has turned the corner? Hayward-Butt says the business is definitely on a firmer footing, with SA seeing its highest sales in February and the UK business also doing well.
Still, it is, at this juncture, difficult to assess the impact Real Foods will have on future profits. Brait has not given historical profit figures, but says it bought the Real Foods assets on the same valuation metrics as Virgin
Active (a nine times multiple on a two-year forward ebitda).
Brait sees Virgin Active’s “maintainable” ebitda at £105m, pointing out that the Real Foods merger and new investment(s) increase the value of Virgin Active from £470m to £633m.
In theory, Brait’s post-transaction 67% stake in new-look Virgin Active would carry an inferred value of R8.5bn — which means the share price suggests that the market is valuing the business at a fraction of that number. Hopefully the results for the year to end-March will offer evidence to support a bulked-up valuation.