Gym group Virgin Active is not ready to be listed yet, says Peter Hayward-Butt, CEO of Ethos Capital, the private equity firm that manages and part owns the gym chain’s owner, Brait.
Ethos, which offers investors access to its portfolio of mostly unlisted assets such as Twinsaver, Primedia, Optasia and TymeBank, reported that its basic net asset value (NAV) per share grew 0.8% year on year to R8.56 in the year to end-June.
Ethos owns about 12% of listed Brait and is paid management fees, including incentives of more than R100m a year, for advising the firm, according to Brait’s annual report.
Brait, backed by investment titan Christo Wiese, owns three assets: Virgin Active, which has branches in the UK and Italy; some of Premier Foods; and a stake in UK fashion retailer New Look. The company’s shares, which peaked at more than R122 in April 2016 before over-indebtedness saw it begin to struggle, forcing asset sales, ended on Wednesday at R2.63.
The plan is for Brait to cease to exist. It will sell its stake in New Look and unbundle shares in Premier to shareholders, leaving only Virgin Active, which will be listed separately. To do this, Brait needs to repay £150m (R3.4bn) in debt due at the end of 2024. In the past year, the listing of Premier Foods raised R4.5bn to repay some of Brait’s other debt.
When Virgin is listed and Brait ceases to exist, Ethos will not earn management fees from the entity. Despite robust questioning in the investor call, Hayward-Butt was adamant that foreign investment banks have all said Virgin is not ready to be listed in the prevailing international environment.
He said the gym business, which struggled during the pandemic, is growing well in Italy and the UK but is still only reaching breakeven and is not yet profitable.
“It’s only now at breakeven coming out of Covid. It’s still got a bit of a journey. Its capital structure needs work. We are getting it back to a position where it can stand on its own,” he said.
Virgin SA has spent more than R400m this year on gym upgrades and work on its app, which adds loyalty points, discounts and Kauai vouchers to retain members in SA as gym contract cancellations are costly.
Outside Brait, Ethos has 21 other investments. It continues to trade at a steep discount to its underlying NAV.
The Ethos share price closed at R4.25 on Wednesday, roughly half of its NAV, which it calculates at R8.56.
Investment holding companies have fallen out of favour in recent years as they add an extra layer of management fees and complexity and many — globally and locally — trade at a steep discount to their underlying NAVs.
Hayward-Butt said in general investment holding companies in SA have underperformed relative to international ones.
To close the discount, Ethos needs to grow returns higher than its cost of capital, but it grew returns on its unlisted investments, excluding Brait, at about 14%. This is in line with what it costs the private equity group to borrow money.
“I think the unlisted assets this year have done pretty well in a massively difficult environment,” said Hayward-Butt.
He said Ethos would not be investing in new funds unless the returns exceed the cost of capital as well as the benefit of investing its money in buying back its own shares.
New funds would need to promise a return of about 22% before Ethos would allocate capital to them. Instead Ethos will be buying back its own shares as a means to increase its NAV per share and better deploy its capital.
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