The curtain opens on TSI's public performance, but a turbulent market prevents stellar returns.
NEW YORK — Some might call Town Sports International's initial public offering (IPO) a matter of bad timing. But how is one to predict the stock market?
As New York-based Town Sports International (TSI) marks another week of public trading since its June 2 launch on the Nasdaq (as CLUB), the industry watches to see if the Northeast powerhouse can match the performance of the industry's star public company, Life Time Fitness of Eden Prairie, MN.
As of press time, the possibility of that happening looked low — for now. Stocks for both companies were selling wide apart. On June 5, TSI's stock closed at $12.90, down from its initial share price of $13.24. Life Time Fitness, on the other hand, closed the same day at $43.35. Of course, Life Time Fitness has had a two-year head start on TSI. It launched its IPO in late June 2004. On its first day of trading, Life Time's stock opened at $18.50 per share and closed at $21 per share. The comparison, however, isn't necessarily fair.
“It's two different worlds when you are two years apart,” Rick Caro, president of industry consulting company Management Vision, said about the IPOs of the two companies. TSI began trading as the stock market showed late May and early June jitters that it hadn't shown two years ago during Life Time's launch. During TSI's launch phase, Mastercard, Burger King and phone company Vonage also began trading. Mastercard's IPO met expectations, but Burger King's was flat. Vonage, on the other hand, took a nosedive, earning it some unflattering publicity.
So, perhaps it isn't surprising that a smaller company like TSI would delay trading and lower its initial share price from $16 to $18 a share to $13 per share. In addition, the company originally planned to sell 10 million shares, but instead offered 8.95 million shares.
TSI's performance didn't improve when just days later Federal Reserve Chairman Ben Bemanke spoke the word “inflation” and said, “the anticipated moderation of economic growth seems now to be under way.” The speech raised concerns about corporate profits in general and caused the markets to tumble.
Added to the stock market's rocky road is the opinion by some that TSI doesn't have the exciting cache of a great story like Life Time Fitness, which is considered a “category killer,” Caro said.
TSI has a solid story, said Caro, but it is not as flashy or quick as Life Time Fitness. For that reason, TSI's movement could be slower, but slow movement isn't necessarily bad as long as it's slow growth and not slow decline.
“It's a great story for someone else in the industry to go public,” he said. “That's a great deal. We'd like them to succeed.”
TSI is known for creating a geographic play with urban facilities and surrounding that with suburban facilities, he said.
“There is an opportunity to have, in theory, reciprocity and in reality a choice in where to work out,” Caro said. “It's a convenience play.”
Currently, Bally Total Fitness, Life Time Fitness, Sports Club Co. and Health Fitness Corp. are the only publicly traded club companies in the industry. Another public fitness company means more analysts will follow the industry, which will educate more of the financial community about the fitness business.
It will take time before analysts can evaluate the company because TSI's true performance won't be known until the company schedules an earnings call to show what it has done as a public company. The first opportunity for that conference call will be a third quarter report released toward the end of this year. A year-end report, which is more meaningful than a quarterly report, will have to wait until next March or April after TSI files its 10K.
Regardless of what future filings show, the IPO infused TSI with cash, which the company has stated it will use to pay off debt.
“It looks better having more equity in their balance sheet and a lot less expensive debt,” Caro said. However, because TSI had to lower its initial share price and the number of shares offered, it doesn't have as much money as initially expected for its growth plans.
“So, they will have to fund growth internally, which they've been able to do before,” Caro said.
TSI plans to expand in its existing Northeast markets — Boston, New York, Philadelphia and Washington, according to comments from Robert Giardina, CEO, during a roadshow with various capital companies on May 15. The company plans to remain aggressive in corporate and family memberships. Its goal is to open 10 clubs per year and grow to 350 clubs in the Northeast. The company owns 142 clubs under the names Boston Sports Clubs, New York Sports Clubs, Philadelphia Sports Clubs and Washington Sports Clubs. It has about 432,000 members and 8,460 employees.
TSI's IPO came not long after it announced first quarter 2006 numbers. During that period, TSI suffered a net loss of $135,000 on revenue of $104 million compared to net income of $179,000 and revenue of $94 million during the same period last year.
Major stockholders prior to the IPO were Bruce C. Bruckmann (39.4 percent); Bruckmann, Rosser, Sherrill & Co., a private equity firm, (38.4 percent); The Farallon Entities (20.6 percent); The Canterbury Entities (10.6 percent); and Mark N. Smith, former CEO of TSI (5.8 percent). Smith, who had been with the company since 1985, left TSI in April but is continuing as a consultant to the company.
As of press time, TSI was still in a quiet period and unable to comment.
888 Seventh Ave. • 25th Floor • New York, NY 10106 • www.mysportsclubs.com
| Business: Third largest fitness club operator in the United States by number of clubs (142) Employees: 8,460 Founded: 1973 | Date of IPO: June 2, 2006 Offer Price: $13 First Day Close: $13.25 Offer Shares: 7.7 million Exchange: Nasdaq | Symbol: CLUB Lead Manager: Credit Suisse Co-Managers: Deutsche Bank, William Blair CEO: Robert J. Giardina |
Business description offered by the company: TSI developed and refined its fitness club model through its clustering strategy by offering fitness clubs close to its members' work and home. Its club model targets the “upper value” market segment of individuals who are between 21 and 50 years old with income levels between $50,000 and $150,000 per year.
Business goal as stated by the company: TSI's goal is to be the most recognized health club network in each of the four major metropolitan regions it serves. In each of TSI's markets, the company has developed clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities. As of March 31, 2006, about 43 percent of its members participated in its Passport Membership plan, which allows unlimited access to all of TSI's clubs in its clusters for a higher monthly membership fee.
Use of proceeds as stated by the company: TSI estimates that it will receive net proceeds from the sale of the shares of its common stock in this offering of about $90.1 million, based on an initial public offering price of $13 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. TSI will not receive any proceeds from the sale of shares by any of the selling stockholders. The company intends to use the net proceeds from the offering, together with cash on hand, to:
Consummate the tender offer for up to $85 million aggregate principal amount of TSI Inc.'s senior notes;
Redeem up to 35 percent of its senior discount notes; and
Pay related fees, premiums and expenses.