- 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.

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