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Virgin Active has lost nearly a third of its active members

All its markets have been taken a punch from Covid-19 …
Club usage in CBDs, including in the UK and Australia, remains ‘subdued’, while SA clubs, some located in office nodes, are noticeably underutilised. Image: Moneyweb

Virgin Active has lost 227 000 active members in South Africa since prior to the Covid-19 pandemic, equating to 31% of its base.

The 31% decline in active members remains a better performance than its clubs in Italy, where the decline has been 35%. In UK, active members are down by 29%, while in its Asia Pacific markets (a far smaller base), the decline has been 39%.

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The number of active members across the group has dropped by 32%, from 1.134 million to 775 000.

Total members, including those on freeze, is down 28%. This is a large decline from the levels seen towards the end of last year. At that stage it had lost ‘only’ 100 000 members globally.

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But owner Brait says sales performance in South Africa has been “strong” since Level 3 lockdown restrictions were lifted in April.

In August it ended its membership “fee freeze” option which allowed members to retain their memberships but not pay their monthly fees.

This saw active members drop from 512 000 in August to 501 000 in September.

It says sales in September and October are “broadly in line with 2019 levels” but that terminations had increased following the ending of the freeze option. It says 5% of members remain on freeze which is “in line with expectations”.

It says there has been a “steady improvement in member engagement”.

Worryingly, terminations in the UK have been higher than expected with “some members” coming off freeze and then cancelling their gym contracts.

Club usage

Club usage in CBDs including London, Sydney and Melbourne remains “subdued”. It has not disclosed any detail on its South African clubs, but some located in office nodes are noticeably underutilised.

It is remarkable that October 30 was the first date this year that all clubs across the group (which operates in South Africa, the UK, Italy, Australia, Thailand and Singapore) were open. Brait says there is a “global trend of members coming back to gyms or using a combination of physical and digital offerings”.

The worry for the group – as Moneyweb has argued for some time – is whether the gym market returns to anything close to ‘normal’ over time. Already, Virgin Active has lost many of its best members. The contract with Discovery where Vitality members’ gym memberships are subsidised has kept membership numbers more stable than they might’ve been.

Financials

It has not disclosed the financial performance of the South African business in the last three months, but says as a whole the group generated Ebitda (earnings before interest, tax, depreciation and amortisation) of £6.6 million (around R140 million) with “all key territories Ebitda positive”.

Brait says there is “significant operating leverage in the business” and that the focus is on “returning rapidly to 2019 membership levels which will provide material value uplift for shareholders”. Elsewhere in its results presentation it notes that “getting back to 2019 levels will take time”.

Brait values the total Virgin Active business at £468.5 million (close to R1 billion), substantially below the level in March 2018 of £1.3 billion. Brait’s stake (80%) is valued at £393 million or R7.97 billion.

Virgin Active has net third party debt of £456 million and Brait’s borrowing is stretched to the limit as it has funded various shareholder facilities to help Virgin Active (and to a lesser extent New Look) restructure and navigate the pandemic.

It has committed a further R760 million as part of shareholder funding for Virgin Active South Africa to restructure and extend that business’s existing debt facilities.

This has practically forced it into a R3 billion capital raise where it will issue an exchangeable bond.

A full R1 billion of this will be used to settle a portion of the investment holding company’s revolving facility. Subtract the R760 million committed to Virgin Active SA and the available liquidity post the rights offer will be R1.2 billion.

Brait and Ethos, which manages the portfolio, are betting big on the recovery of Virgin Active. There are plans to list Premier, the fast moving consumer goods manufacturer, as soon as next year. But there is an existing R3 billion convertible bond that matures in December 2024.

Add in the new R3 billion exchangeable bond which matures at the same time, and there’s an awful lot that has to go right in the next three years.

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