24 Hour Fitness Bulks Up With $85M

By Clifford Carlsen
Of The Daily Deal

Monday, October 29, 2001

Health club operator 24 Hour Fitness Worldwide has added $85 million in new equity in its seventh round of private investment since 1995, as the IPO market continues to emulate the proverbial 98-pound weakling.

The deal, announced Oct. 29, brings back a long list of investors, led by the New York and Menlo Park, Calif., private equity firm McCown De Leeuw & Co., and including Triumph Capital, Lexington Capital Blackstone Group Teachers Pension Fund, all of New York; and Houston-based Rice Capital.

The money will help maintain growth of the chain, which operates more health clubs than any other company, and which will surpass $1 billion in sales this year for the first time.

The new round wraps up investment made in the company over the last two years and provides money for the company to open about 25 clubs next year. Founder and CEO Mark Mastrov would not disclose a valuation on the round, but said it represents an increase over the most recent equity round, which came concurrently with a recapitalization in late 1999.

Although it does not disclose profitability, the company compares in size to Chicago-based Bally Total Fitness Holding Corp., which recently had a market capitalization of $546 million, down from more than $1 billion in January.

"This is just another investment round for growth, the company is operating profitably today," Mastrov said. "We will target about 25 stores in new growth, at least half of it outside the United States, most of it in 'green field' development."

Mastrov said the company has raised more than $500 million in equity since it took its first outside investment from McCown De Leeuw in 1995, and that it now carries about $440 million in debt after the recap that brought in the additional investors in 1999.

At the time, McCown De Leeuw issued subordinated notes with warrants attached in that deal, that also included $375 million in bank debt, $140 million in new equity, $60 million of convertible-preferred shares and $200 million of existing equity. That came on top of a $75 million equity round at the end of 1997 after the company called off a planned public offering.

Mastrov said the company is operating self sufficiently today, but raised the additional equity to finance continued growth in 2002 that will surpass the company's expansion by 22 stores this year.

The money will allow development of health clubs from scratch, and Mastrov said the company is not looking aggressively for additional acquisitions, though it will consider opportunistic buys, particularly in Europe.

Phil Collins, a partner with McCown De Leeuw, said the latest closing is the culmination of funds the firm has been providing for growth since the recapitalization, and he said it may invest additional money for growth in the future.

"Our perspective on this investment is that there is still tremendous international growth opportunity," Collins said. "We believe it can get to self-sustaining growth without additional investment, but it is too early to say what it will do."

Collins said that despite the canceled public offering, McCown De Leeuw is in no hurry to look for an exit. The firm originally invested from its McCown De Leeuw III fund, but has recently invested from its $750 million McCown De Leeuw IV fund closed in 1998.

Other representative investment from that fund have included a large stake in the publicly traded Aurora Foods Inc., which had several executives resign amid reporting problems in 2000, and a funeral industry rollup with former executives of Loewen Group Inc. that bought many assets of that bankrupt cemetery and funeral home operator. The purchase of 127 properties for $193 million in 1999 was part of Loewen's asset-disposal program, to pay down a substantial portion of its roughly $2.2 billion debt. McCown is betting that Loewen's original plan of capitalizing on the coming mortality of the Baby Boom generation was sound, but that it had overreached.