UK health club Virgin Active has cancelled plans for a South African IPO after a deal with private equity investment group Brait SE.
Bank of America Merrill Lynch (BAML), Goldman Sachs, Morgan Stanley, Standard Bank and UBS were initially chosen as book runners for the IPO.
Brait picked up 80% of the business for £682 million ($1 billion). While Richard Branson’s Virgin Group will keep a 20% stake in the business, London-based private equity company CVC Capital Partners will sell its entire holding.
The deal, which values the company at £1.3 billion, will net Branson’s Virgin Group £230 million.
“The [initial IPO] deal caught a lot of people by surprise as it wasn’t a dual track listing,” says one investment banker based in South Africa not involved on the deal. “And from what I can tell, none of the banks involved in putting together the IPO was accredited on the vendor side.”
Brait, which is 35% owned by South African billionaire Christo Wiese, financed the stake in Virgin Active after the private equity company’s deal in November, when Brait sold a 34.9% stake in Pepkor Holdings to Steinhoff International Holdings, South Africa’s largest furniture retailer for ZAR24 billion.
|Investors were disappointed when the Virgin Active IPO was cancelled, but they'll still be able to get exposure to the asset|
Brad Webber, Standard Bank
“The deal made sense for Brait,” says Brad Webber, head of investment banking business development at Standard Bank based in Johannesburg; Standard Bank advised Brait on the M&A transaction.
"Not only did they have the cash, but a company such as Virgin Active fits their consumer-focused portfolio. It will be a long-term hold for the company.”
The question is whether the scrapped IPO has dented the Johannesburg Stock Exchange's allure, but bankers are quick to downplay the deal's significance for the broader market.
“Plans for the IPO began around November last year, with the initial idea of going to the market around May this year,” says Webber. "But then Brait came up with a deal, giving the stake holders a relatively short window to make up their minds about the deal. They decided it was the best way to move forward."
Someone who worked closely on the IPO preparation adds: “I wouldn’t over dramatize the M&A transaction as taking away from the IPO market in South Africa. But this has been a trend recently, where potential IPOs have become M&A transactions.
"So far this year, there have been around five of these types of transactions – potential IPOs turned M&A deals.”
In January, rail ticket provider Trainline was bought by private equity company KKR from Exponent just two weeks after plans for an IPO were announced.
“Investors were disappointed when the Virgin Active IPO was cancelled, but they will still be able to get exposure to the asset,” says Webber.
Virgin Active used to have more sites in the UK than in South Africa, but the situation has reversed over the last year with 114 gyms in South Africa versus 101 in the UK. Branson founded Virgin Active in 1997 and the chain now has 267 clubs with more than 1.3 million members in nine countries.
“Virgin Active has proven its operating model in the South African market and is a savvy buy for Brait,” says Philip Lindop, head of banking at Barclays Africa CIB.
One CEO at an international bank based in Johannesburg adds: “Brait had been tracking Virgin Active for a while. They liked the brand, which is consumer-focused and multi-jurisdiction. It was a neat fit for Brait.”
Brait also has stakes in Premier, a staple foods producer in South Africa, and the UK’s frozen food chain Iceland.
Barclays' Lindop adds: “Life insurance company Discovery introduced behaviourist incentives to their model, related to which is the stickiness in Virgin Active's subscriber base. Discovery is a very successful company in South Africa, and its relationship with Virgin Active should give the gym company a halo.
"This relationship affords the gym company access to high-quality customers, which will continue to drive success in the South African market."
Brait’s stock rallied after the deal with Virgin Active, rising from ZAR83 on the April 14 to ZAR90 when the deal was announced. Share prices have remained flat since.