Giulietta TaleviTo hear Brait CEO Peter Hayward-Butt tell it, managing the once-magnificent private equity powerhouse these past few years has been a bit like being stuck inside a particularly brutal spinning class – with no downhill runs in sight. Until now, perhaps.
That’s because Brait has painfully whittled itself down to just three assets: UK fashion retailer New Look, a 34.4% stake in Premier Foods, and gym chain Virgin Active. And, if all goes according to plan, these businesses will be sold off, spun off, and given back to shareholders within the next two years.
“No-one will be happier than me,” Hayward-Butt tells Currency.
You can understand why: Covid just about killed the gym bunny, the massively-indebted New Look was already on its knees when 2020 blew in, and management had to rely on a staple foods producer in cash-strapped South Africa – Blue Ribbon owner Premier – to pull it out of the dwang.
“Would I choose to do it again? No chance,” he says.
The harrowing past five years are amply reflected in Brait’s share price, which had dwindled to just 79c by late July this year. Consider that the stock once changed hands for more than R160, back in pre-Brexit times when management thought New Look was hot (it actually wasn’t), and Brait was valued at a premium to its assets – a situation that is practically unthinkable now.
Still, the listing of Premier last year, a R1.5bn rights issue in August, and a deal with its bankers (a three-year extension on the maturities of its convertible bonds) mean Brait shares are back at just under R2, and faith in its main asset – Virgin – is no longer looking entirely misplaced.
A lost half-decade
It is Virgin where the real, remaining value lies – and it’s what happens to this asset that should be of interest to any would-be buyers of Brait (and, certainly, any shareholders who have grimly stayed in).
The target has long been for the gym chain to hit earnings of about £125m by December 2025. For the six months ended September, earnings before interest, tax, depreciation and amortisation (ebitda) rose fourfold, giving it a run rate of £93.7m as of October.
That “run rate” is, broadly speaking, the calculation of number of members times the yield (the money it makes per member), less the cost. The 2025 target, says Hayward-Butt, “is eminently achievable”.
Roughly speaking, 75% of Virgin Active’s revenue flows straight through to earnings because it’s a fixed-cost business, so costs aren’t added when new members are signed up. “This year, for example, we had a 20%-odd increase in revenues but a fourfold increase in ebitda. It’s just the nature of a subscription-based business,” he says.
The sobering aspect is that Virgin Active is only now back to where it was, on a constant currency basis, in 2019. Talk about a lost half-decade.
While Sasfin’s David Shapiro likes to describe gyms as the ultimate Ponzi scheme, Körner Perspective owner Graeme Körner says he’s not “grumpy” about owning the stock any more. He ended up with Brait shares by being an investor in Ethos, which unbundled Brait to its own investors.
“All those disbelieving smarty-pants sitting in the Ethos presentation a year ago may be thinking they are on track for £125m ebitda, in which case this is not a write off and maybe a R10bn valuation is not irrational,” says Körner.
As far as Brait’s valuations are concerned, Virgin Active is worth R10.12bn, its shares in Premier are worth R4.6bn, New Look is pegged at R822m, and there’s R4.6bn in liabilities that have to be repaid. In all, that puts Brait’s net asset value at R3.10 a share, considerably above Thursday’s share price of R1.98.
It’s mean, but germane to mention what the old Brait (under then-CEO John Gnodde) paid for these assets: R12.2bn for the Virgin Active stake in April 2015, and more than R14bn for the highly-leveraged New Look a month later.
Still, that’s money long gone. The key factor for investors who may have bought in at the lows of late was the involvement of retail tycoon Christo Wiese, who effectively underwrote this year’s rights issue. “He’s a smart guy and he doesn’t underwrite stuff if he’s sure not to make money,” says Körner.
Alive and kicking
The scepticism about the death of gyms during Covid – voiced by the likes of former Bidvest CEO Brian Joffe (at the time the head of Long4Life, which owned Sportsmans Warehouse) – was also misplaced.
“Brian had a view which I thought at the time was wrong and it’s proven to be so,” says Hayward-Butt. That’s not to say that Virgin Active has an unassailable position anywhere – though revenue growth for the six months in Italy (19%), Singapore (34%), South Africa (16%) and the UK (11%) is hardly shabby.
“None of these things have a big moat – you have to create that,” says Hayward-Butt. “A moat is not just having a good gym in a good location, it’s about how you engage with your members: are you offering the right product suite, what do they do after gym? There’s a social wellness element that [Virgin Active CEO] Dean Kowarski is really focused on; if you’ve got an injury, how do you solve it? So that’s all built around membership retention. We’ve got a lead but people will always try catch up, so we have to evolve that strategy as we go.”
Kowarski founded healthy food chain Kauai, which is incredibly important to the Virgin Active experience. Without Kauai, Virgin’s revenue grew 16% – with Kauai in the mix, it was 23% higher. Kowarski is regarded as something of a wellness “visionary” in the market. His main task is to not only sign up new gym members, but also to keep them – and get them to spend more money on all the growing ancillary services in the clubs.
The plan is thus: sell New Look in the next 12 to 18 months, list Virgin Active, and then unbundle or sell Premier, pay off all the debt, “and then the whole thing is gone and we’ll be out of here”, says Hayward-Butt.
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