Australia | Sep 17 2012
– Ardent expands via fitness club acquisition
– Deal boosts Victorian market share
– Acquisition structure a positive in UBS's view
– Associated fund raising to retire debt and fund further growth
By Chris Shaw
Late last week Ardent Leisure ((AAD)) announced the acquisition of ten established Fenix Fitness Clubs and a further two under construction for $60.9 million. The clubs are situated in Victoria and Queensland.
The price paid is higher than what Ardent has historically paid, Macquarie pointing out that on FY12 EBITDA (earnings before interest, tax, depreciation and amortisation) it is understood to be around $9.5 million, which implies a trailing EBITDA multiple of around 6.4 times. This compares to historical multiples for similar acquisitions of 3.5-4.0 times. Even with the higher price the acquisition is expected to deliver mid-to-high single digit earnings accretion.
The premium is justified in the view of Deutsche Bank, due to both the quality and size of the clubs being acquired and the positive impact of Ardent strengthening its market position in Victoria. Deutsche also suggests integration risk with respect to the new clubs will be low, while the acquisition will provide some leverage with respect to both membership numbers and margins.
For UBS the big story for Ardent is not the acquisition but the fact Fenix is to be acquired in an operating company under the listed entity, rather than in Ardent Leisure Trust. This means a stapled structure, allowing Ardent to retain taxed earnings from the operating company.
Ardent has always needed a better operating structure in the view of UBS, but with earnings now available to reinvest in higher growth divisions such as Main Event the group's capital position looks better.
Macquarie agrees, noting the new structure will also boost cash flow flexibility while helping address the issue that Ardent's capex and dividend payments were not being supported by internal cash flows. Ardent will also be able to slowly build up franking credits, which UBS suggests will allow for a higher level of franking with dividends going forward.
The Fenix acquisition is to be funded by a capital raising and some debt, Ardent announcing a $50 million underwritten placement at $1.28 and up to $20 million from a retail share purchase plan. Ardent has also put in place a new $34 million debt facility. The additional funds will retire debt but over time will also be used to fund growth. Macquarie expects part of this growth will come from an accelerated roll-out of the Main Event format.
On news of the Fenix acquisition brokers have adjusted earnings forecasts for Ardent Leisure. While the acquisition will be accretive, Deutsche Bank has lowered core EPS forecasts by 9% in both FY13 and FY14 to account for a higher expected dividend reinvestment plan participation rate and changes to Main Event roll-out assumptions. EPS forecasts for Deutsche now stand at 11c and 13c respectively.
RBS Australia has made little change to its FY13 numbers but increased forecasts for FY14 by 2.4%. Consensus EPS forecasts for Ardent Leisure according to the FNArena database now stand at 12.3c for FY13 and 13.7c for FY14.
Changes to estimates have meant modest increases to price targets, the consensus target according to the database increasing to $1.45 from $1.39. Targets range from Macquarie at $1.33 to RBS Australia at $1.58.
The Fenix acquisition has not prompted any changes to broker ratings for Ardent Leisure, the FNArena database showing two Buy recommendations against three Hold ratings. RBS is responsible for one of the Buy recommendations, this reflecting the view Ardent continues to generate benefits from its asset diversification strategy and the distribution yield of more than 9% in FY13 is attractive.
UBS agrees, attracted to the defensive growth on offer from Ardent and an attractive valuation given an estimated Enterprise Value to EBITDA multiple of around seven times in FY13.
Macquarie counters by arguing while the Fenix acquisition will be accretive to earnings the stock has already rallied solidly as investors have chased yield, to the point Ardent shares are now trading at a significant premium to the market based on earnings expectations.
Shares in Ardent today are higher in a stronger overall market and as at 10.20am the stock was up 3c at $1.32. Over the past 12 months the stock has traded in a range of $1.005 to $1.40. The current share price implies upside of around 12% relative to the consensus price target in the FNArena database.
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