Fitness First in talks with lenders over soaring interest charges

Fitness First, one of the world's largest gym groups, has been forced into talks with its lending banks as the private equity-backed group – which had been hoping for a sale or stock market flotation – admitted it was struggling to meet spiralling interest bills. The business, which was founded by entrepreneur Mike Balfour as a single gym in Bournemouth 19 years ago, employs about 10,000 staff largely in the UK, Australia and Germany. Owners BC Partners had hoped to float Fitness First on the Singapore stock exchange, appointing advisers including Credit Suisse and JP Morgan last year. That plan was ditched last autumn and subsequent efforts to sell the business have proved fruitless. The last published accounts showed the group had net liabilities – the sum of its assets minus liabilities – of £612m in October 2010. A string of acquisitions and a debt-fuelled private equity structure had left the business, which has 1.2 million gym members, with borrowings of £1.48bn. Much of that debt is held by BC Partners and smaller shareholders – £490m in the form of controversial high-interest bearing preference shares. Despite the tough economic climate, under a structure set up in 2005, these preference shares are entitled to an annual dividend of 15%, although payouts are deferred until 2015. The interest bill on similarly onerous preference shares at Peacocks was blamed by some for fatally weakening the Cardiff-based fashion retailer, which fell into administration last week. Administrators from KPMG are looking to sell the business as a going concern. Despite many expressions of interest long-time Peacocks observers feel a piecemeal sell-off is more probable. Fitness First was floated on the junior AIM stock market in 1997 by Balfour, who went on to lead the business through a management buyout backed by Cinven in 2003. At the time his stake in the business was worth £11m — half of which he is said to have reinvested alongside the new owners. Two years later, Balfour persuaded rival buyout group BC Partners to pay £835m for the business, funded by about £500m in borrowing. Balfour left the business in September 2009, several months after Tony de Leede, founder of the group's Australian business. Both still own significant amounts of shares – though the value of these is now unclear. BC Partners and others had injected £50m worth of bonds into the business in the autumn of 2010 to help keep it in financial health. A month later, Fitness First's banks agreed to ease lending terms in exchange for higher interest rates. A more fundamental restructuring of the group's balance sheet is now required ahead of the loan maturing dates next year. Fitness First has sold its poor-performing Benelux business for £24m – well below book value – to help cut borrowings. Stripping out debt owed to BC and other shareholders, Fitness First is now said to have net borrowings of £550m. Official accounts list its banks as Royal Bank of Scotland and Mizuho, although it is thought neither is among the many lenders with an exposure to the company. Fitness First declined to comment.