Brait eyes listing Virgin
IMPROVING: ALL THIS HINGES ON VIRGIN ACTIVE BEING IN ‘LISTABLE FORM’
Aim is to ‘unbundle these to shareholders’ as soon as gym business is ready.
With the plan to list about half of its stake in Premier finally underway, Brait has started the timer on its strategy to return all its capital to shareholders.
All of this centres on Virgin Active – its most valuable asset after the sale of a chunk of Premier – being in a “listable form”.
In little more than 24 months from now – in theory – only two assets will be left inside Brait: the residual stake in Premier and a 67% holding in Virgin Active.
The intent is to “unbundle” these to shareholders as soon as the Virgin Active business is in a state to do so.
The global health club business, now combined with Kauai and Nu, is still recovering from the bruising impact of Covid lockdowns. Last year (calendar 2021), it reported revenue of £292 million (around R6 billion), with earnings before interest, tax, depreciation and amortisation (Ebitda) of £78 million.
This is a far cry from the £600 million in revenue and £134 million in Ebitda achieved in 2019.
Members are returning to gyms, with sales in South Africa and Italy in line with budget. In the UK and most of the Asia Pacific, sales are below budget.
The local business has improved, with active members exceeding the Ebitda breakeven membership level of 524 000 for the last 10 months. Member numbers are up 18% so far this year at 587 000, but the base is still only 81% of the level in December 2019.
The operation in Italy has also recovered well, with members at 87% of levels last seen pre-pandemic (December 2019). It crossed the Ebitda breakeven level in October with prior months below that mark. In the UK, it has practically reached the Ebitda breakeven point but the membership base is at 72% of 2019 levels.
Managing the impact of utility costs in these two European markets is a key focus for the group.
Brait’s value of the gym business is premised on “maintainable” Ebitda of £113 million (including the £3 million/R60 million) from Real Foods, owner of Kauai and Nu).
The overall business has a value of around £1 billion (R20 billion in round numbers), but Virgin has its own debt pile of £438 million by the end of September.
This leaves a value of about £533 million, of which its two-thirds stake is “worth” £393 million. Getting Virgin Active’s profitability back to something resembling historical levels is something new CEO Dean Kowarski will be fixated on.
It has two years to get there. By that point, Virgin needs to be firing on all cylinders to make it an attractive investment. This will mean a higher multiple and a better price at listing, which means a better return for long-suffering Brait shareholders, Christo Wiese and Ethos included.
Brait is targeting R3.7 billion in proceeds from the Premier listing (excluding a R950 million distribution its already received).
It used half of the distribution to reduce its R2.6 billion revolving credit facility (the balance is now at approximately R2.1 billion) and it will use the funds from Premier’s listing to settle this debt.
This means it’ll have around R2 billion in cash left. With one of its debt structures out of the way, it will have R2.8 billion in convertible bonds and R2.5 billion in exchangeable bonds remaining.
Both expire in December 2024 and the group plans to ensure that the convertible bonds are converted, redeemed early (for cash), or coupon holders will be “cash settled” at the deadline.
The proceeds left over from Premier’s listing plus the sale of its stake in New Look (pencilled in for some time in 2024) should do the trick.
This leaves only the exchangeable bonds. These exchange into 686 million Brait shares, a 51% increase on the current number of issued shares.
The calculation is that the value of the other half of Premier and the two-thirds of Virgin Active will be higher than the Brait share price in two years’ time and that listing the gym business (either separately or by collapsing the Brait structure) will unlock materially more value.