Investment Opportunities for Private Equity Investors in the Danish Fitness Sector

Alexander Haase & Joachim Jensen

Student thesis: Master thesis


The fitness industry in Denmark has within the last couple of years seen high growth rates with Fitness World being the dominant player with yearly growth rates around 19%. The number of fitness clubs has since 2016 doubled, and even though 810,000 Danes have a gym membership, the market for fitness is expected to grow in the coming years. With only one fitness club in Denmark being owned by an equity fund, and with a growing market, it seems reasonable to evaluate whether the fitness market is attractive to private equity investors. The purpose of this thesis is to examine if the fitness market is attractive for private equity investors with an investment horizon of 5-7 years.
Low barriers to enter, many substitutes and low switching costs should lead to a higher degree of rivalry, and which is why Fitness World for instance has been forced to adjust their business model and their types of training because of new players entering the market. Niche-oriented fitness gyms have had success of competing with large players like Fitness DK and Fitness World with Crossfit Copenhagen being an example.
Crossfit Copenhagen opened in 2008 but still only had 5 workout locations in 2011. In 2015 Crossfit Copenhagen started to expand and are expected to continue the growth in 2016, 2017 and 2018. Crossfit Copenhagen only focuses on crossfit and has since 2010 seen growth in gross profit of 63% yearly. Another example of these attacks on mainstream fitness gyms is the Fresh Fitness gym, which opened in 2010 focusing on low-cost, and was in 2014 acquired by Fitness World as a defense buy. Fitness World was the first fitness club which was acquired by private equity investors in Denmark and are expected to be listed on the stock exchange before 2020. Because of this, Fitness World is not assessed as a potential target for a private equity investor, unless the IPO fails. In terms of number of chains in Denmark, Loop Fitness is the second biggest fitness chain after Fitness World, but generates not enough cash to be attractive to private equity investors.
Crossfit Copenhagen should be seen as an attractive investment opportunity for private equity investors with a 5-7 investment horizon, who are willing to have the first 1-2 years with negative cash flow (FCFF) because
it requires openings of new workout facilities, and then afterwards have positive stable cash flows (FCFF). Crossfit Copenhagen has since 2010 had EBITDA growth of on average 35% yearly, and have the possibility to expand further outside the Copenhagen area with the possibility of opening 9-10 new workout facilities in the coming years. With a required return on capital of 15% which seems to be in the lower end of the private equity business, the equity value would be DKK 54m. The valuation is based on the discounted cash-flow model, the adjusted present value model, and 3 different multiples.
A leverage buyout is possible but because Crossfit Copenhagen is so asset light with all equipment and workout-machines being leased, there is not enough collateral to finance a leverage buyout with secured senior debt only – mezzanine capital is therefor needed at an estimated interest rate of 13% which are based on 10 different banks’ lending agreements. At leverage buyouts the target firm often pay extraordinary dividends to the acquirer after the takeover, but this would not be possible in this case due to insufficient equity value. According to the budget it will be possible to pay out dividends at a satisfying scale, but not in the first 1-2 years after the takeover, and it will also require new loans to finance the payments. The assessment is that Crossfit Copenhagen is attractive to private equity investors, but not perfect, because the firm still are in a growing phase, where private equity investors often appreciate a firm in a mature phase more.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2016
Number of pages146