There were times in the past three years when I thought I’d never witness traction in Brait’s share price. The overriding doubt in the market around Brait’s valuations for its two big investments — health and fitness chain Virgin Active and consumer brands business Premier — coupled with the limited options to deal with the hefty debt load, pressed relentlessly on investor sentiment.
But since mid-August Brait shares are up more than 120%, even breaking through the 200c level last week … which is not that far from the exchange price of 221c a share for the Brait Investment Holdings exchangeable bonds.
The fact that I am holding my current position through this robust rally probably speaks to my masochistic nature when it comes to investing. I could bail out with a shred of dignity … and probably should, but I’d like to be there when the endgame finally plays out. That might be 18 months or two years away, unless major shareholder Christo Wiese opts to buy out minority shareholders before the final value unlock kicks in.
The endgame, I suspect, will entail unbundling the remaining holding in strong-performing Premier to shareholders and listing Virgin Active on the London Stock Exchange (with a secondary listing on the JSE). Presumably, before the Premier unbundling Brait will sell down its holding in Virgin Active by placing shares with large institutional investors, and use the proceeds to extinguish the remaining debt. The Virgin Active shares will then, I suppose, be unbundled to shareholders. The possibility of a buyer emerging for all, or selected regional slabs, of Virgin Active seems unlikely at this juncture.
At the time of writing, the discount the market places on Brait’s diluted NAV of 281c a share is about 30%. It has narrowed markedly from a year ago when it was well over 50% — and the rights offer concluded in August 2024, at 59c a share, was pitched at a discount of more than 70%.
The scepticism about Brait, obviously, still centres on Virgin Active. Factoring in Premier’s share price (which has now fattened to R115) and accepting the value slapped on the leftover stake in UK fashion business New Look, the Brait share price infers that the market values Virgin Active on a much more modest earnings before interest, tax, depreciation and amortisation (ebitda) multiple than Brait’s official nine — which the group points out is slightly below a peer group of international fitness groups.
Brait still talks about £124m or so as the maintainable ebitda number for Virgin Active — which in effect restores the business to pre-Covid levels. While that looked awfully optimistic a few years ago, the implied run rate for Virgin Active’s ebitda has been set at £93m. That seems easily achievable since in the interim period to end-September, Virgin Active generated ebitda of nearly £57 from revenue of £431m.
Italy — where another 10 new clubs are in the pipeline over the next five years — continues to be the star of the show with revenue growing a sprightly 19% year on year. South Africa remains solid, but the UK is worryingly insipid.
I still wonder whether Brait would entertain offers on select bits of Virgin Active. The Italian gym market, for instance, seems to offer serious scope for growth. Virgin Active is the largest operator in that country, but gym market penetration is estimated at an underweight 9% compared with 13% for Germany, 17% for the Netherlands, 19% for Denmark and 21% for Sweden.
In the meantime, Virgin Active is scouring Western Europe for markets that offer high affordability and come with fragmented competition; judging by Brait’s investment presentation, these could include Belgium, Spain and France. Expansion seems possible in Germany — where, ironically, Virgin Active’s predecessor, the old Health & Racquet Club under LeisureNet, got into quite a tangle after an ambitious territorial stretch.
Brait still talks about £124m or so as the maintainable ebitda number for Virgin Active – which in effect restores the business to the pre-Covid levels
One worry, I suppose, is the capital expenditure required by Virgin Active to expand its presence in selected territories, upgrade clubs and keep up with maintenance. The business, as Brait stresses, is strongly cash flow generative. As long as the run rate in ebitda keeps picking up — and with an increasing yield and steady membership growth it should — there should be enough cash flow to underpin most capex demands in the next few years.
The UK does worry me, though. Economic prospects look dour, and one hopes efforts to revamp and reposition some of the tired health and fitness clubs in old Blighty do not see missteps in capital allocation.
Speaking of capital allocation — in this case undisputedly smart — the proposed minority buyout at services group Workforce seems like it will proceed sans hitches. The 165c a share offer price lags my calculation of tangible NAV — 225c a share — by a country mile. But the share hardly trades, and even dipped to as low as 101c this year. An orderly exit will probably suit long-suffering minorities, and already Flagship Asset Management and former CEO Philip Froom have given undertakings to accept the offer.
I’m not entirely sure at what price Workforce came to the market in late 2006 — maybe 100c a share? But I do know it was 24 times oversubscribed — not surprising for a time when labour-broking was a sweet spot in a relatively lively economy. In any event, the founder is not stumping up a huge fortune for a business that has R113m cash on hand and managed a not-insubstantial ebitda of R151m in its most recent financial year. Pretty purr-fect for CEO Ronny Katz.
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