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New Owners for 24 Hour Fitness

SAN RAMON, CA — Some big pockets are about to take possession of 24 Hour Fitness, which not only speaks well for future investment in the fitness industry, but could also mean new partnerships for the health-club chain.

24 Hour Fitness announced last month that Forstmann, Little & Co. had bought the company for $1.6 billion. The deal is expected to be finalized this month pending regulatory approvals.

Last September, Forstmann, Little & Co. bought talent and marketing agency IMG Worldwide, which has clients such as Tiger Woods, Annika Sorenstam, Serena and Venus Williams and Peyton Manning. IMG also runs sports academies, broadcasts sporting events and operates tournaments in the tennis and golf arena.

The deal could lead to benefits such as discounts for 24 Hour members at IMG training academies or celebrity endorsements for 24 Hour Fitness from IMG talent. Not that 24 Hour Fitness is hurting in that area. Andre Agassi, Lance Armstrong, Magic Johnson and Shaquille O'Neal already have lent their names to some co-branded 24 Hour Fitness facilities.

However, in a conference call after the sale was announced, Mark Mastrov, founder, chairman and CEO of 24 Hour Fitness, and Ted Forstmann with Forstmann, Little, wouldn't speculate on future partnerships.

What Mastrov would say is that the company plans to open more clubs each year, but won't be doing so through franchising. He said the company might consider buying other clubs on the market. In addition, instead of concentrating on building 40,000- to 70,000-square-foot facilities as the company has done in the past, he plans to build more 10,000- to 15,000-square-foot express facilities.

All of that building and buying will take deep pockets, which Forstmann, Little & Co. seems to have. Forstmann, Little & Co. will finance the 24 Hour Fitness transaction with more than $900 million from its equity and subordinated debt funds with the balance coming through a senior loan facility. This conservative capital structure will provide 24 Hour Fitness the capital to fund internal growth and expansion in domestic and Asian markets, according to the chain.

“What a great story for the industry,” said Rick Caro, president of consulting company Management Vision. “It's a sign that another pure club company with a leader who started it back 20 plus years ago can now be appreciated by savvy financial people and be bought for $1.6 billion. This is an example that one does not have to go public to have an exciting exit strategy for the old company and a plan to grow for the new owners.”

The sale of 24 Hour Fitness coupled with the financial success of Lifetime Fitness since its IPO last year make it more likely that club companies such as Town Sports International, LA Fitness and Equinox could be bought by larger private equity companies or go public, said Caro.

Founded in 1983 by Mark Mastrov, 24 Hour Fitness has 330 clubs in 16 states serving 3 million members with 17,000 employees. The company earned more than $1.1 billion in revenue in 2004.

Mastrov will continue to lead the company with his existing management team and will retain a significant stake in the business.

“I'm very excited for Mark Mastrov and his management team because it shows what can happen when you organize yourselves well with an understandable business model and finally have a successful capital event after years of preparation,” said Caro.

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