Bally, LA Fitness Complete Sale of 171 Clubs

Bally, LA Fitness Complete Sale of 171 Clubs

Bally Total Fitness has completed the transaction to sell the assets of 171 clubs to LA Fitness, the companies announced today. The deal affects several major markets in the United States.

The completion of the sale comes 12 days after Fitness International LLC, an affiliate of LA Fitness International LLC, Irvine, CA, announced it had agreed to acquire the assets from Bally Total Fitness Holding Corp., Chicago.

Paul Norris, principal, LA Fitness, released the following statement to Club Industry today regarding the acquisition: “Our objective in general is to make this transition as easy as possible for both the members and the employees. We will be servicing all of the membership agreements that we acquired from Bally. The majority of clubs we acquired will remain open, but we will be closing some of the clubs before the end of the year. If we close a facility, we will transfer those members’ agreements to a nearby facility, either an acquired Bally or an LA Fitness. We plan to add new equipment to many of the clubs, and we also have plans to remodel, expand or relocate a number of the clubs to larger and newer facilities.”

Norris added: “After the closing of our asset purchase, the employees at the clubs we purchased will no longer be employed by Bally, but we hope that they will apply for positions with us. We will do our best to find a spot for every qualified Bally employee who wants to be part of our team.”

The price of the sale is $153 million. Bally will maintain about 800,000 members in its 100 remaining clubs, according to Larry Larsen, a spokesperson for Bally. Larsen adds that the company will be debt-free after the closing of the acquisition.

“We will have significant cash on hand from the proceeds of the transaction that will allow us to have the financial flexibility to explore additional opportunities going forward,” Larsen says.

LA Fitness targeted some of the bigger markets in the country in its acquisition, adding approximately 40 clubs in the Los Angeles area as well as 27 clubs in the Chicago area, 13 in the Philadelphia area and 12 clubs each in the Miami and Washington, DC, areas. Those figures are based on an examination of the locations of clubs on Bally’s website before the deal was finalized.

Other metropolitan areas in which Bally clubs will change over to LA Fitness include Detroit (11), Portland, OR (10), Seattle-Tacoma (seven), Atlanta (six), New York (five), Minneapolis-St. Paul (five), Pittsburgh (three), Tampa-St. Petersburg, FL (three), Orlando, FL (two), Phoenix (two) and Dallas (two).

All told, Bally will no longer operate clubs in the following states: Arizona, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Minnesota, Oregon, Pennsylvania and Washington, plus the District of Columbia. The states in which some Bally clubs are transferring to LA Fitness are New Jersey (Deptford, East Brunswick, Echelon, Maple Shade and Union City), New York (Copiague, Lake Grove and Levittown), Texas (Meadow Creek and Red Bird) and Virginia (Falls Church, Landmark, Pentagon Square and Prince William Crossing).

Bally will continue to have more than 20 clubs in the New York area as well as 10 in Houston, nine in the San Francisco-Oakland-San Jose area and seven in Denver, according to locations listed on the Bally website prior to the deal. Other cities that will still have multiple Bally clubs include Cleveland (seven), Boston (five), Dallas-Fort Worth (five), San Antonio (four) and Milwaukee (four).

“You will have a more focused portfolio,” Larsen says. “We will have 100 clubs across the country, but it will be more focused in key markets where we have critical mass.”

Stephen Tharrett, president of Club Industry Consulting, Highland Village, TX, says the Bally clubs are a good fit for LA Fitness.

“Bally is in parts of the country where they’re not, or they’re in parts of the country where LA Fitness may not have as many clubs,” Tharrett says. “It makes sense strategically from two perspectives: They’re serving a similar demographic, [and] they’re operating a similar business model, so it makes sense.”

LA Fitness, which listed 360 clubs at the end of last year, has built 18 clubs this year, 11 of which were replacement clubs, bringing its net total to 367 clubs. With the close of this transaction, LA Fitness has 538 clubs.

Rick Caro, president of Management Vision Inc., New York, says LA Fitness may have pre-negotiated deals with landlords to close some of the newly purchased clubs.

“If LA Fitness had a club in a market and Bally was in the same market, they may choose to move the Bally membership over into an existing LA Fitness club and have worked out a deal with a landlord to close the previous Bally club,” Caro says. “In many cases, the ideal formula for any buying situation is to maximize the return, and if the return includes closing a club and moving over that existing membership as best you can to a pre-existing club and making the existing club even stronger, that may be part of the formula for success.”

Tharrett estimates that LA Fitness will close 30 to 40 of the acquired clubs. He speculates that private equity firms played a key role in the acquisition and that LA Fitness could eventually launch an initial public offering (IPO). LA Fitness did not immediately respond to a request seeking comment about this speculation.

In addition to its executive management team, LA Fitness is owned by three main investment companies: Seidler Equity Partners, Marina del Ray, CA; CIVC Partners, Chicago; and Madison Dearborn Partners, Chicago. Seidler Partners has been with LA Fitness since 1998, and CIVC Partners joined the company in the early 2000s. In 2007, Madison Dearborn acquired a 20 percent stake in LA Fitness for a reported $600 million.

Tharrett says Madison Dearborn may be looking to get a return on its investment as it approaches the end of a five-year window, which is the approximate length of time for a private equity firm’s investment.

“In order for them to get that type of return, they’ve got to have growth,” Tharrett says. “LA Fitness has gone through mostly organic growth. It’s had very little acquisition activity. They’ve pretty much tapped out on organic growth. There’s not too many places where they can build new.

“I think they’re trying to probably position themselves at some point for an IPO because that’s what those [private equity] guys see as the best way to get their money back. They had to do a major acquisition. They didn’t have a choice.”

Tharrett also says the challenge for LA Fitness will be to rebrand the Bally clubs. Caro says LA Fitness will have employees at the newly acquired clubs to answer questions from former Bally members about transferring their memberships.

“If there’s anything that’s good for this industry, it’s the extent to which LA Fitness is trying to take care of the customers and trying to meet all of the proper communication with third parties,” Caro says. “Bally has had a host of different membership concepts over the years, so there may be a lot of people who have questions. They’re rebranding as we speak, so it’s got to move very quickly.”

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