Wooing Wall Street


For years, the health club industry has pursued Wall Street without any return on that affection. In fact, some might say that Wall Street has been blind to the industry. However, as the economy turns around and new efforts are put in place to wake up Wall Street to the health club industry, analysts and investors may soon come knocking on health club doors in pursuit of a good investment.

“Wall Street doesn't follow the health club industry really closely,” admits Fred Siegel, president of the Siegel Group Inc., a registered investment advisory firm. Siegel is author of Investing for Cowards and the upcoming books, 401ks for Cowards and The Richest Man in Babylon for Today.

Health clubs have no one but themselves to blame for the state of Wall Street's ambivalence. In the past, the industry has been remiss about keeping Wall Street analysts informed about the industry.

In addition, the anemic number of public companies in the industry makes it difficult for investors and analysts to understand the industry. Only Bally Total Fitness and The Sports Club Company are public. The data gathered from Bally and Sports Club Company isn't sufficient to judge the industry because these two companies are atypical, says Rick Caro at Management Vision.

Bally uses a different business model than most health clubs. The club's propensity for signing people to multiyear contracts and then financing those membership fees makes Bally a hybrid firm — a health club as well as a consumer finance company.

The Sports Club Company, parent company of Sports Club/LA and New York Reebok clubs, develops high-end clubs with $25 million in start-up costs, says Caro. The company has a strong real-estate component. The major stockholder in the company is Millennium Partners, which is often the landlord for the company's health club facilities — another anomaly in the industry.

“Uniqueness has been a problem,” says Caro. “Both of these companies are not typical of the majority of health clubs.”

Therefore, when analysts look at the industry, they look at what is readily available — numbers from these two atypical companies. While about 10 private equity firms have invested in club groups, a number have not because few of them are willing to invest in an industry where the only “knowns” are anomalies.

“One of the issues is the cart and the horse phenomena,” says Bill Howland, director of public relations and research at IHRSA. Bally was the only operator in the public domain for years, which meant investment bankers didn't have a model for comparison. No standard formula existed to allow institutional investors to readily understand how the health club industry worked and to determine things such as whether a company's management was competent.

“It did not help the industry's track record with the record of consumer abuses,” says Howland. “That reputation followed the industry for quite some time.” However, he sees that turning around now as companies have shown that they can be big, profitable and quality-oriented without abusing consumers.

The lack of exposure to Wall Street hurts clubs' ability to raise money, which in turn, hurts their ability to expand. The right mix of financial firms hasn't entered the industry, says Caro. Large companies in most industries don't have to stop at talking to a bank about financing; they can also talk to insurance companies, pension companies and other types of investors. However, few large companies in the health club industry have been able to do so because Wall Street hasn't yet embraced the industry, he says.

“Once companies spend time looking at the industry, they are impressed with the amount of cash flow, the recurring revenue story through monthly dues with electronic funds transfer, and they are quite impressed that there's more predictability with this industry than with many other industries,” says Caro.

“The industry is still a deep, dark secret with many firms who haven't spent the time to figure it out,” says Caro.


Wall Street wants a quick understanding of the industry's strengths and data about how the industry performs in unfavorable economic times. To give Wall Street what it wants, IHRSA has been tracking some of the reasonably sized clubs for key statistics to show how the industry fairs. IHRSA also has hired a public relations firm to help educate financial companies about how to understand the health club industry and to provide more industry information to investors and analysts.

The industry must continue to educate through press releases, articles, guidebooks and profiles of success stories. More industry representatives need to attend banker meetings, assessor meetings and financial conferences. Siegel suggests more industry executives meet with Wall Street analysts to get the word out on the industry.

“The more they raise the awareness of Wall Street analysts, the more coverage they will get,” Siegel says.

In addition, the industry must create a more enviable track record, Caro says. That often comes with the sale and the move for more clubs to go public.

“The more health clubs that go public, the more awareness there will be on Wall Street,” Siegel says.

While the economic climate in the past few years has made it difficult for public offerings in almost every industry, that may be changing.

“In general, venture capitalists and bankers have been sitting on the sidelines,” says Howland. “They are obligated to do something with the money that has been sitting there. The good news for the industry is that the economy appears to be turning around and these investors have to get into the game. Some of these folks are revisiting their plans to invest in our industry.”

When investors do get back into the game, they will be looking for investments of at least $20 million, Howland says.

“They have a minimum threshold in terms of the investment they want to be involved in,” says Howland. “The industry is dominated by small, independent operations or small three to five club groups. A business of that size does not hit the radar screen for Goldman Sachs. So, that's been part of the equation.”

Not that every health clubs wants or needs Wall Street to compete.

“I think that's a positive for our industry — that there is room for the major players, the brand names, and there will always be room and a need for independent operators,” Howland says.

However, the more independent operators out there, the harder it is for those operators who want Wall Street's attention to get it. But it is possible, as we have seen.

“What we saw in 1998-2000 was club groups that had institutional investors behind them in expansion mode — acquiring or building and developing new locations from the ground up,” says Howland. “[They were] laying the ground work, building businesses that are more likely to appear on Wall Street's radar screen.”

Those efforts may pay off as the economy turns around.

“I think 2004 will be a significantly different year and, hopefully, a much better year than 2002-2003, which were twins of each other,” says Caro. “It will be a year of opportunity for club groups of all different sizes to group, re-evaluate and pursue some healthy growth.”

If the economy holds up and industry efforts to woo Wall Street prove successful, then health clubs could see more resources be made available to them soon.

“For a lot of club groups, life will change, hopefully for the better,” Caro says.

Public Opinion

A look at select fitness companies' starts to the New Year.

Name Symbol Exch. Close 1/06/04 52-week hi 52-week lo
Bally Total Fitness BFT AMEX 7.14 10.27 4.36
Brunswick BC NYSE 31.70 32.20 16.35
Cybex CYB AMEX 1.22 1.91 0.98
Health Fitness Corp. HFIT.OB OTC BB 1.26 1.54 0.38
Nautilus NLS NYSE 14.05 16.75 10.00
Sports Club Co. SCY AMEX 1.81 3.00 1.65
Leading companies for public offerings in 2004, according to industry insiders, are Lifetime Fitness, Town Sports International and 24 Hour Fitness.

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