Do You Want to Be a Public Company? (And Should You Be?)

It's time to go public about the recent rumblings in this industry about going public.

We are a couple of weeks removed from the release of first quarter 2012 earnings from public companies Life Time Fitness and Town Sports International (TSI) on the club side and Life Fitness, Cybex and Precor on the manufacturer side.

Recently, Planet Fitness confirmed that it had negotiations about taking the company public but added it has no current plans to go public in the wake of its recent lawsuit with the PFNY group.

Last week, Michael Bruno, owner of Land America, which runs Star Trac and the StairMaster and Schwinn brands, spoke openly about plans to take his company public in China. That company would not have an initial public offering (IPO) until 2014 at the earliest, Bruno says.

Is taking a company public the next big trend in the industry? Industry analysts have strong opinions on the topic.

Rick Caro, president of Management Vision, New York, talked briefly in our May issue about the difficulties a franchise club company would have after going public. Caro elaborates further here regarding all would-be public fitness club companies.

"It's not clear that there's a panacea out there that going public for this industry is all that successful of a route," Caro said. "The two companies (Life Time and TSI) will tell you it's damn hard to tell an attractive story every quarter, every three months, because this industry doesn't lend itself to those kinds of stories easily."

Just ask Life Time, which cracked the $1 billion revenue plateau for the first time last year. Yet despite encouraging results last quarter, the company saw headlines on Internet stories including "Life Time Fitness sees soft Q2" and "Why Life Time Fitness' Shares Plunged."

The investing world can be a tough crowd. What's that old saying from oil company executive Nelson Bunker Hunt? A billion dollars isn't what it used to be.

Does going public make a company better and the industry more viable? Not necessarily so, according to Stephen Tharrett, president of Club Industry Consulting, Highland Village, TX.

"I am not sure going public brings any great value to our industry," Tharrett says. "Our best operators and most profitable tend to be private, and for a reason."

Caro said he had not heard any discussions in the investment banking industry about Planet Fitness going public, saying that the company did have a couple of private-equity suitors in the last few years. One of those companies was Goode Partners LLC, which has investments in some apparel and restaurant companies among others.

Peter Tamposi, the attorney representing Planet Fitness in the PFNY lawsuit, said that the company took its lead from investment bankers who were optimistic about the likely outcome of Planet Fitness becoming a public company.

"My expectation is that our banking partners and other professionals would keep our plans private until we were prepared to move," Tamposi says. "So I would be surprised if word of our plans to go public had leaked out in advance."

Tharrett says he doubts that Planet Fitness would be a good public offering.

"Especially once it gets past the first day," Tharrett says. "The key driver of share price is a history of revenue and earnings growth, which of course they have experienced. Going forward, I believe analysts would see a flatter growth curve, in part due to the fact they are a franchise [company], and the revenue and earnings growth is likely to be less than if the clubs were all owned."

Tharrett also says Planet Fitness' discussion about going public is an "obvious" exit strategy on the part of the investors, whose only other exit option would be selling to another investor group.

"Nearly every investor, and in particular those who initially invested in the business, eventually desire an exit where they can cash out," Tharrett says. "An IPO is one way that the investors can cash out with large returns, but selling to another investor group also can provide an excellent exit strategy. The difference between an IPO or sale as a form of viable exit really depends upon the financial position of the current investors and stakeholders, and the market's receptivity to sales multiples or IPO multiples."

When asked for a response to Tharrett's contention about the IPO talk, Tamposi said that had Planet Fitness not discovered the allegations they claim of their PFNY partners in the lawsuit—allegations the PFNY partners deny—going public "would have been an obvious road to liquidity."

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