A new financing deal in the works for LA Fitness could result in a change in the ownership structure of the Irvine-based fitness chain.
The privately held company, the largest health club operator in the U.S. by revenue and gym count, is looking to finalize a $1.6 billion credit facility, according to a pair of recent ratings agency reports.
The deal, as currently structured, would include a $1 billion term loan due in 2020, a $350 million revolving loan due in 2018, and another $250 million term loan due in 2018.
Specifics of the loans, which had not been finalized as of last week, haven’t been disclosed.
The chain’s parent, Irvine-based Fitness International LLC, could use a large part of the funding to buy out the ownership stakes of one or more its equity partners, according to the rating agencies’ preliminary reports on the financing deals.
“We expect the company to use proceeds to refinance existing debt, fully repurchase a current owner’s equity interests in the company and a portion of another owner’s equity interests, and to pay for transaction fees and expenses,” according to a June report by Standard & Poor’s Rating Services.
Up to $1 billion of the funding could be used to buy out the larger of the partners, according to the S&P report.
It has not been disclosed which partners could be bought out.
LA Fitness, according to news reports, is majority-owned by CIVC Partners and Madison Dearborn Partners of Chicago, and Siedler Equity Partners of Marina del Rey. Calls to those companies were not returned last week.
Madison Dearborn has been reported to be the last of the three companies to invest in LA Fitness, paying an estimated $600 million for a 20% share in the club operator.
Officials from LA Fitness could not be reached for comment last week.
Chinyol Yi and Louis Welch, who cofounded LA Fitness about 30 years ago in Costa Mesa, also are believed to have significant ownership stakes in the company.
Fitness International was initially seeking $2 billion in financing, with $1.4 billion of that earmarked to buy out the ownership stake of one of its largest owners, according to Moody’s Investors Services Inc.
The company late last month scaled down its total financing plan to $1.6 billion, with $1 billion of that slated to buy out the undisclosed owner or owners.
It’s not clear, based on ratings reports, what prompted the change in the dollar value of the stake held by the owner expected to get the payout.
Clubs, Revenue
LA Fitness operated 609 fitness clubs in 29 states across the U.S. as of March, as well as 16 in Canada.
Those clubs served about 3.8 million members, making about $1.7 billion in total revenue, according to Moody’s.
The Business Journal last month estimated LA Fitness to be Orange County’s 12th-largest private company by revenue.
Growth
The company has nearly doubled the size of its portfolio since 2009. Its biggest burst of growth took place in 2011 when it paid $153 million for 171 clubs from Bally Total Fitness.
LA Fitness overtook San Ramon-based 24 Hour Fitness as the country’s largest fitness chain shortly after that deal was completed, according to fitness industry trade data.
Aggressive growth—fueled by acquisitions and gym openings—appears to have added to LA Fitness’ debt load.
Standard & Poor’s last month gave the company a “B” corporate rating in anticipation of the financing deal getting completed, with a stable ratings outlook.
That rating reflects “our assessment of the company’s risk profile as ‘fair’ and its financial risk profile as ‘highly leveraged,’ ” the S&P ratings announcement said.
“Moody’s expects that free cash flow will be modest over the next two years as the company continues to open new clubs and that permanent debt reduction above and beyond required amortization will be minimal over this time frame,” according to a June ratings announcement.
LA Fitness officials said in 2012—when the company had about 500 clubs—that they expected to have more than 700 clubs by 2015.
Recent openings for the company included a flagship gym at the Park Place campus in Irvine.
