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Q2 2021 - (released August 2021)

SA's quarterly Private Equity & Venture Capital magazine

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EPE relies on more than feathers and wax to save Virgin Active

by Michael Avery

The story of Brait is a private equity Icarus and Daedalus cautionary tale, with the folks at Ethos Capital brought in to try and reassemble burnt wings and wax to get the underlying assets to fly again.

Investment holding company, Brait, which owns South Africa’s largest gym chain, Virgin Active, says it managed to turn a profit in its year to end-March, boosted by a profitable sale of its Iceland Foods business.


The investment holding company, in which billionaire Christo Wiese still holds a substantial stake, reported that its net asset value fell 4.47% to R7.90 year on year to end-March, but was up 2.5% from the end of September. Total investment proceeds almost tripled to R3bn, with the group reporting headline earnings of R446m — from a loss of R15.96bn previously.


The Iceland Foods sale completed in June 2020 for £115m (R2.3bn), at an 83% premium to its carrying value at the end of the group’s 2020 financial year. Virgin Active now makes up 48% of Brait’s R16.45bn portfolio, while Premier Foods makes up 45%.


The Brait share price is essentially only the value of Premier Foods at the moment, so the worst possible outcome for Virgin Active looks priced in. Peter Hayward-Butt, CEO of Ethos Capital, told Catalyst that he is pleased with the progress that the team has made so far, in turning the various underperforming assets around.


Hayward-Butt points to the rump still being in relatively good shape. “You’ve got Premier Foods, which has performed very, very strongly through COVID, and is looking to continue that performance. You've got Console, which is going well since the alcohol ban was lifted, and is almost back to full capacity; in fact, is extending its capacity. You've got New Look, which is a UK fashion retailer, which isn't big in our lives from a value perspective. But I do think it's decent optionality to shareholders, and I think that's had a good comeback from a difficult time during COVID. And then, obviously, the biggest asset, which is Virgin Active (VA).”


Hayward-Butt credits Virgin Active management for “knuckling down” and taking costs out of the business. “They did everything they could,” says Hayward-Butt, “but when we got to the back end of last year, we realised that, particularly around the UK business, we needed to restructure that business, which we did. We did a wholesale restructuring. We've got concessions from all the stakeholders, including the landlords and the banks, and that's put the business in a much, much better position than it
was, certainly going into COVID. We're starting to see the UK open up and we've been very positively surprised by how quickly people have come back, how quickly sales have come back in those markets.”


Despite some sceptics questioning whether a return to pre-COVID gym routines will be forthcoming within the next 24 months, or at all, Hayward-Butt is resolute that it’s a great business that will withstand the current COVID storm. “It’s on most high streets and in most people's suburbs. It's a well-known name, and I think we've got a relatively loyal customer base,” says Hayward-Butt.

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“So, we haven't seen the fall off there, in terms of memberships, that we've probably seen elsewhere in the world.” That said, he points to the government’s continuous game of whack-a-mole as a key point of frustration. “That [the government] is going from level one to three, back to level one and maybe potentially level five does definitely impact the psyche of members, for one. But secondly, the ability to sell memberships is quite difficult in an environment where people don't really know if it's going to be open and where they're going to have to go. From a health and safety perspective, we focused on that. It's about human psyche. So… so far, so good. But we are hopeful that we can manage through it, particularly if it's a short-term phenomenon.”

The other concern is the level of debt that still sits throughout the structure. If Brait consolidated its investments, it would have R3bn EBITDA (normalised for 2023) and R17bn debt, for leverage of almost six times. This assumes that Virgin Active recovers to the levels that management is
predicting by 2023. Because Virgin Active is currently trading at depressed levels, the actual leverage is several orders of magnitude greater than this.

When pushed on the debt, Hayward-Butt acknowledges the markets’ concern. “You know, it's a good question. And, obviously, you’ve got debt at two levels. At the portfolio company level, New Look has got just about no debt; Premier has paid down most of its debt and is only at 1,5x leverage which, for that business, is more than adequate; and Consol, while it is highly leveraged, it’s a massively cash generative business, so the analysis goes to the heart of Virgin Active, which has been very significantly impacted. It’s gone from an EBITDA of about £140m to a negative £13m this year, so that impacts the 17 divided by 3 that you referred to. As a group, we are myopically focused on trying to pay down the debt, and there are options to do that. We just need to ensure that, from a shareholders perspective, we are doing it in a value accretive manner.”


As the Greek myth goes, Daedalus flew to safety; Icarus flew to the Sun. He was so impressed by the power and strength of his
wings that he flew ever higher in the sky, out into space, and even to the Sun itself. The wings, being made of feathers and wax, melted in the Sun's heat, and Icarus plummeted to his death. Shareholders will be hoping that Hayward-Butt and the EPE team will be the Daedalus to the Icarus of Brait’s former management.