When the asphalt seems to be melting on the streets of Riga from the summer heat and most of the people, including the team of, have sought refuge by moving to the beaches or to the countryside the deal making comes to a standstill. Despite this, in late July City Fitness, a leading Latvian fitness club chain, was acquired by Estonian My Fitness.

To a large extent City Fitness has played the role of trailblazer in the Latvian market. Established in 1990s by Mr Lau Stig Nielsen, a Danish national, it was the first to change the market by moving fitness clubs out of the basements and shabby premises and into the shopping malls. Limiting its operations to the capital city of Riga only City Fitness has developed into one of the best recognised brands in the fitness business (the staff members of our publisher are among the customers of City Fitness).

According to public statements as at closing of transaction City Fitness operated 7 clubs servicing more than 8,000 clients. The corporate structure of City Fitness is somewhat complex consisting of five separate companies with four of them established to operate a single club. On a pro forma consolidated basis in 2013 the companies reported revenues of EUR 1,622 thousand, profit after tax of EUR 20 thousand and EBITDA of EUR 212 thousand. Its interest bearing debt has been reduced during the year and amounted to EUR 178 thousand, or just 0.84x times the year 2013 EBITDA.

The profitability at EBITDA margin level on a consolidated basis stood at 13%. It is hard to gauge all the real reasons behind the rather modest profitability without a deeper analysis. Meanwhile, it is interesting just to note the very low or even negative margins at the oldest clubs compared to 30+% reported by the more recent venues.

As usual, the transaction details remained confidential. Taking into account the modest profitability and rather stagnant growth over the last years it is not easy to find arguments why this business should be valued at more than 4.0x to 6.0x EBITDA, which would result in an equity value of somewhere between EUR 669 thousand and EUR 1,092 thousand. Such valuation would reflect the current cash generating ability of the franchise and its value as a platform for further expansion while recognising that any operational improvements and expansion plans will come at the expense and risk of the new owner.

On the other hand, there are indications that the seller has been able to find a very committed buyer in My Fitness. With the required deep pockets and plans to grow the business across the Baltics My Fitness could raise the game to a completely new level. In such a case, an EV/EBITDA multiple of 10.0x (which would value the equity at almost EUR 2 million) or even above is not inconceivable. Of course, this would put the new owners under a tremendous pressure to build a leading pan-Baltic operation to achieve similar valuation when they decide to seek a buyer. But this is their challenge which they hopefully are prepared to tackle. Meanwhile, Mr Nielsen has apparently made a nice exit!


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