By Maano Andy Thovhakhale

Brait, say that the South African business of Virgin Active has continued its recovery with membership sales above 2019 levels and significantly stronger membership engagement on the back of some of the strategic changes implemented by the new management team.

In South Africa, clubs/gyms were subject to capacity restrictions in line with lockdown regulations until February 2022. Since the relaxation of Covid restrictions and the removal of capacity restraints in Q1 2022, Virgin Active South Africa has shown good traction on membership recovery. Sales have recovered to levels similar to 2019 levels with active members growing from 497k as at 31 December 2021 to 557k as at May 2022. 

At an overall group level, Virgin Active has seen a strong growth in the membership base since the start of the 2022 calendar year across the key territories from 754k active members as at 31 December 2021 to 847k active members currently, with a significant reduction of the members on freeze.

Virgin Active Holdings Limited has injected £30m into Virgin Active UK, Italy & APAC and £10m into Virgin Active South Africa for liquidity and growth purposes.

Brait has a goal to grow Virgin Active’s EBITDA to >£200m through expansion into the broader wellness space offering experiences and services to members in a personal way and driving communities within Virgin Active gyms.

Acquisition of The Real Foods Group.

March 2022, Virgin Active acquired the nutrition assets of The Real Foods Group namely Kauai and Nü for £28.6 million and will be merged into Virgin Active South Africa to create a wellness group. Brait is which is majority owned by Dr Christo Wise owned 79.8% of Virgin Active at the time.

In 2015, Brait bought an 80% stake in Virgin Active Group in 2015 for £698.8 (R12.85bn) as follows;

  • 51% of Virgin Active owned by private equity group CVC Capital Partners and
  • 29% of Virgin Active owned by Sir Richard Branson’s Virgin Group.

Virgin Group retained 20%.

Virgin Active made up 45% of Brait’s total assets incorporated in the 30 September 2021 reported NAV per share of R8.14, a significant premium to Brait’s current share price (which traded at R4.31, 47% discount), prior to the announcement of the transaction with Real Foods. 

Virgin Active is one of the largest global fitness brands and achieved record like for like EBITDA in 2019 of £142 million prior to the pandemic. EBITDA has seen fallen to -£19 million in FY21 due to the lockdown regulations that limited activities citizens could do in an attempt to curb the spread of Covid-19.

Kauai is SA’s largest healthy, fast casual restaurant group, with 169 stores across South Africa, Namibia, Botswana, Scotland, the Netherlands and Thailand. 80 are corporate owned stores and 88 franchised. There are “In Motion” stores which are located in Virgin Active gyms. 

Kauai has partnerships, with other lifestyle brands (e.g. Vitality, Vodacom, eBucks) where drinks or vouchers are provided by Kauai. Kauai has also partnered to roll out concessions in Checkers stores in SA; of the 30 new stores opened in FY21 and FY22, 9 of the corporate stores are Checkers concession stores.

Virgin Active together with Kauai and Nü have had a partnership since 2005 with nutritional offerings in 108 of Virgin Active’s gym. Kauai and Nü are currently the exclusive provider of in-club food and beverage services in Virgin Active South Africa gyms under a long-term contract and nutrition already forms part of Virgin Active South Africa’s strategic plans.

Brait said that “nutrition and exercise are key drivers of health and wellness, which, if effectively integrated into the customer value proposition, have the potential to improve Virgin Active’s acquisition, retention and customer lifetime value”.

Dean Kowarski, founder of Real Foods also got appointed as the CEO of Virgin Active effective 01 March 2022. Dean acquired the Kauai business in 2015 and has grown its store footprint from 100 to 204. This is a great move as Dean knows Kauai and Nü like the back of his hand.

Virgin active also got £88.4m (R1.8bn) as follows;

  • Existing shareholders of Virgin Active, Brait and Virgin Group: £20.2n
  • DK consortium in Real Foods £18.2m and
  • Titan Premier Investments (investment vehicle) of Christo Wiese, £50m to become new shareholders in Virgin Active.

Brait’s equity and shareholder funding participation in Virgin Active was diluted to 70.6% post Virgin Active’s £88.4 million capital raise from 79.8%. A further dilution to 67.4% is expected when the amalgamation of Kauai and Nü chains of healthy fast casual restaurants, which remains subject to regulatory approvals is concluded.

There was also a R950m Virgin Active South Africa shareholder guarantee capitalised by existing shareholders.

This additional capital raise provides capital for liquidity and to drive new growth initiatives. In addition to providing liquidity to support growth, the capital will be used to:

  • Rejuvenate the estate where required, and invest in equipment/product and skills to improve the member experience,
  • Invest in sales and marketing to drive sales and improve the acquisition channels,
  • Continue the investment in the product offering and facilities to drive penetration and reduce churn, and
  • Invest in digital and technology to improve customer loyalty, CRM systems, digitalisation, data and personalisation.

End of 2019, Brait’s board approved a recapitalisation plan that sought to reduce Brait’s net debt by up R5.3bn. This was a big recapitalisation.

At the time of the recapitalisation, Brait’s net debt was R11.965bn which included two large debt maturities in 2020 of:

  • £350m, 2.75% senior, unsecured Bonds and
  • the Brait Mauritius committed revolving credit facility drawn at R6,402bn

Brait needed money to reduce the debt.

In 2020, Brait then conducted a rights issue of R5.2bn. 

Ethos Private Equity invested R1.3bn into Brait as part of the rights off and also become the new advisor to Brait.

The advisory agreement with Ethos incorporates the following key principles: 

  • The agreement is envisaged to have an initial three-year tenor, with an annual renewal thereafter
  • The advisory team responsible for advising the board of Brait consists of Ethos executives and certain members of the current Corporate Advisors to ensure continuity, and
  • The new investment advisory agreement entered into with Ethos Private Equity will be at an initial reduced cost of R100m p.a. with annual inflationary linked increases.

With Ethos Private Equity on board and the significant debt reduction, Brait shareholders will be hoping that Brait and Virgin Active will kick on from hereon. Brait is down 92.91% in the last 5 years. 

The mathematical relationship between losses and gains is a reciprocal one. 

Use this formula =[1 / (1 – % Loss)] – 1 to check % gain you need to restore that loss of 92.91%.

Hint: A 90% loss needs a 900% gain to recover that loss.