Highlights Significant Opportunity to Create Value by Repurchasing Shares
Impactive Capital, LP ("Impactive"), an active, impact-driven investment firm, which together with its affiliates owns more than 10.0% of the outstanding common shares of Basic-Fit N.V. (AEX: BFIT) ("Basic-Fit" or the "Company"), today issued a letter to Basic-Fit's CEO and Supervisory Board regarding the significant opportunity to create value by repurchasing shares of the company on the open market.
The full text of the letter is set forth below:
René Moos
Chief Executive Officer, Basic-Fit
December 19, 2024
Dear René and members of the Supervisory Board,
As you know, Impactive has been a significant shareholder of Basic-Fit for more than two years. Today, we are the company's largest single shareholder.1
We are writing to recommend that you initiate meaningful share repurchases. You have heard this recommendation from us before, including during our recent conversations in New York, and we hope this letter will convey our conviction in the opportunity to create significant value by repurchasing shares on the open market at anywhere near the current price. We have appreciated our collaboration to date and look forward to continuing our constructive dialogue.
Over the past five years, through a difficult operating environment that included a global pandemic, Basic-Fit has more than doubled in size and profitability, growing from 784 to 1,575 clubs and increasing EBITDA from €155 million to €318 million.2 In the Benelux, France, Spain, and now Germany, access to a gym membership is greater than ever before. In large part, that's because of Basic-Fit. You, the entire management board, and Basic-Fit's more than 8,000 employees should be incredibly proud of this achievement.
Yet, Basic-Fit's valuation has not kept pace with this growth. The company's enterprise value is virtually unchanged since 2019, and the company's share price has fallen by 38%.3 As discussed above, profits are much higher today, and the lack of share price performance over the past five years is attributable to a 48% decrease in the company's forward EBITDA multiple, from 11.7x to just 6.1x.4 Even more starkly, Basic-Fit currently trades at less than seven times the cash management expects the company to produce next year prior to spending on new clubs.5 Such a valuation is typically reserved for companies for which investors expect profitability to decline. However, Basic-Fit will grow EBITDA by more than 20% this year and recurring free cash flow by more than 30%.6
Basic-Fit currently trades at an all-time low valuation despite significant growth in free cash flow that will come over the next few years, driven by maturation of existing clubs, improved performance of recent gym cohorts, leverage on corporate expenses, and the launch of the company's capital-light franchise initiative. As long as the profitability growth from these drivers is not recognized by the market, it makes sense to buy back stock.
With respect to alternative uses of capital, we acknowledge the importance of continuing to source attractive locations and densify your network in geographies where competitors are expanding. For that reason, we believe a dual approach of opportunistically repurchasing shares and continuing to grow organically in countries like Spain best advances the company's long-term goals.
Based on your expectations for club profitability at maturity, you'd be repurchasing shares today at just 4.5x mature EBITDA, even if Basic-Fit never opens another club.7 We think you agree that the company's shares are deeply undervalued at this price, based both on your public comments and the fact that you and other members of Basic-Fit's management board have purchased shares at similar prices on multiple occasions.8
Over the next three years, based on management expectations, Basic-Fit will produce between €799 million and €931 million of cumulative free cash flow before new club capex, representing, at the midpoint, an astonishing 63% of the company's current €1.4 billion market capitalization.9 Even at the low end of this range, Basic-Fit can repurchase €300 million of its own shares, reducing shares outstanding by more than 20% at today's price, while continuing to open 100 clubs per year, before any growth from franchised clubs, and de-levering from 2.8x as of June 2024 to below management's mid-term net debt to EBITDA target of 2.0x by year-end 2027.10
We support making progress towards what management and the supervisory board consider an optimal leverage level over time. However, in determining the pace of de-levering, it is prudent to take into account opportunity cost. When the opportunity cost of cash is high, as it is today with Basic-Fit's shares trading well below their intrinsic value, the pace of de-levering should be slowed. Even while repurchasing €100 million of its own shares per year, Basic-Fit would rapidly de-lever over the next three years as EBITDA grows. The company has the financial strength to buy back stock now and achieve its leverage targets.
During our time as shareholders, in addition to our interactions with the management board, we have valued building a relationship with Basic-Fit's supervisory board, including Chairman Jan van Nieuwenhuizen and Vice-chairman Carin Gorter. Having had the opportunity to speak to Jan, Carin, and other board members, we are grateful to have them as stewards of the company. We know the supervisory board appreciates the importance of repurchasing shares as a capital allocation tool, given their approval of an authorization to repurchase up to 10% of shares outstanding at the company's annual general meeting in April.
Long-term shareholders benefit to the extent the company repurchases shares below intrinsic value. They benefit most if the company does so at the lowest possible price. In that sense, a low stock price, when acted upon, is good. However, especially if a company does not choose to act, persistent and extreme undervaluation creates risks. At any time, an interested party could make a public offer to acquire the company that fails to reflect its full value.
As we previously outlined, Basic-Fit currently trades at a valuation that does not capture its substantial growth prospects. We believe this undervaluation reflects investors' concerns that the company may not re-deploy its future cash flows optimally.
We urge you to build confidence that you will pursue an optimal capital allocation policy by acting on the clear undervaluation of Basic-Fit today in the market via repurchasing shares. Without taking this step, there can be no guarantee that shareholders with shorter time horizons would not support a transaction that undervalued Basic-Fit's very bright future.
Customers across Europe have benefitted from Basic-Fit's growth under the stewardship of the current management team and supervisory board. Basic-Fit has expanded access to fitness by making it available and affordable, with approximately half of the company's new members having never held a gym membership. More than 4 million members are healthier, and happier, because of Basic-Fit. Customers are not the only ones benefiting. Basic-Fit's efficient model that forgoes energy-intensive pools and other amenities is reshaping the industry's environmental profile, and the company continues to improve in this area, reducing per-club energy use by 17%11 in 2023 and transitioning its clubs to cleaner energy sources like solar.
We want to see Basic-Fit remain a successful, stakeholder-minded public company for a long time. Demonstrating flexible capital allocation is a necessary part of ensuring that's possible.
We have always appreciated our open and direct dialogue and look forward to continued discussions regarding why a capital allocation policy that involves opportunistically repurchasing shares is in the best interest of all Basic-Fit's stakeholders.
Sincerely,
Alex Van Buskirk
Lauren Taylor Wolfe
Christian Asmar
Notes
1 Based on disclosure from the Dutch Authority for the Financial Markets (AFM), René Moos is the largest non-Impactive shareholder, owning 7.7 million shares of Basic-Fit. As of the date of this letter, Impactive owns more than 7.7 million shares.
2 2019 clubs and EBITDA as reported. Clubs of 1,575 based on management guidance for year-end 2024. EBITDA of €318 million based on midpoint of management guidance for 2024 of €305 million to €330 million.
3 From year-end 2019 to December 18, 2024, Basic-Fit's enterprise value increased by 3% from €2.3 billion to €2.4 billion. Current enterprise value based on €21 share price, 66 million shares outstanding, and €1.0 billion in net debt as of June 30, 2024. Outstanding convertible bond treated as debt at face value of €304 million. Over that same period, the company's share price decreased by 38% from €34 to €21.
4 As of year-end 2019, Basic-Fit traded at a forward EBITDA multiple of 11.7x based on an enterprise value of €2.3 billion and consensus 2020 EBITDA of €196 million (average of ING, Morgan Stanley, and RBC). As of December 18, 2024, Basic-Fit traded at a forward EBITDA multiple of 6.1x based on an enterprise value of €2.4 billion and consensus 2025 EBITDA of €386 million. Consensus 2025 EBITDA based on median of 9 analysts as published on Basic-Fit's investor relations website on September 10, 2024.
5 Based on a current market capitalization of €1.4 billion and management's 2025 free cash flow before new club capex range of €3.50 to €4.10 per share, or €231 to €271 million, from Basic-Fit's November 9, 2023 capital markets day. €231-271 million range based on 66 million shares outstanding as of November 2023 CMD. Free cash flow before new club capex ("recurring free cash flow") defined as underlying EBITDA, less maintenance capex, other capex, cash interest, and cash taxes; definition excludes the impact of changes in working capital which have historically been a source of cash.
6 EBITDA growth rate based on 2023 EBITDA of €261 million and management guidance for 2024 EBITDA of €305-330 million, or €318 million at the midpoint, representing growth of 22%. Recurring free cash flow growth rate based on 2023 free cash flow before new club capex of €138 million (€2.09 per share) and management guidance for 2024 free cash flow before new club capex of €2.60-2.95 per share, €2.78 per share or €183 million at the midpoint, representing growth of 33%. Management guidance as provided in Basic-Fit's Q3 2024 trading update press release (October 18, 2024).
7 Mature Club EBITDA based on management expectation for €460,000 in EBITDA per mature club and 1,575 existing clubs or €725 million. Mature EBITDA of €518-542 million based on mature Club EBITDA of €725 million less marketing of €87-95 million and corporate overhead of €95-111 million. Marketing expense based on management's "medium term" expectation of 5.5-6.0% of revenue per November 2023 CMD and 1H24 results call (July 26, 2024). Corporate overhead expense based on management's "medium term" expectation of 6.0-7.0% of revenue per November 2023 CMD. Revenue for expense calculations based on management expectation for €1 million in revenue per mature club per November 2023 CMD and June 11, 2024 investor presentation plus €11 million in non-club revenue (1H24 annualized). Current enterprise value of €2.4 billion divided by €518-542 million yields a range of 4.5x-4.3x mature EBITDA.
8 Based on AFM disclosure. Basic-Fit CEO René Moos purchased 150,000 shares at an average price of €22.08 on November 3, 2022. Basic-Fit CFO Hans van der Aar purchased 6,000 shares at an average price of €19.85 per share on March 25, 2024, 2,000 shares at an average price of €20.58 on April 29, 2024, 1,000 shares at an average price of €20.05 on June 20, 2024, and 10,000 shares at an average price of €22.10 per share on December 5, 2024.
9 Based on management's expectation for free cash flow before new club capex per share from November 2023 CMD of €3.50-4.10 in 2025 and €4.30-5.00 in 2026 or total free cash flow before new club capex in 2025 and 2026 of €231-271 million and €284-330 million, respectively. For simplicity, 2027 free cash flow before new club capex range assumed to be equal to 2026 range of €284-330 million.
10 Free cash flow before new club capex of €799 million (low end of range), less €375 million of new club capex (€1.25 million per club, per management commentary; multiplied by 100 clubs per year, or 300 total), less €300 million of shares repurchased (€100 million per year), would yield €124 million of cash available from 2025-2027 to pay down debt. At year-end 2027 net debt of approximately €0.9 billion, net leverage as defined under the company's bank covenants will fall below 2.0x on an LTM basis as long as 2027 covenant-defined EBITDA is equal to or greater than approximately €450 million. Covenant-defined EBITDA permits up to 15% in pro forma adjustments per company disclosure. Consequently, year-end 2027 net leverage would fall below 2.0x as defined by Basic-Fit's bank covenants if 2027 reported "underlying EBITDA" is equal to or greater than approximately €383 million. For reference, consensus underlying EBITDA is currently €386 million for 2025. Year-end 2027 net debt based on June 2024 net debt of €1.0 billion less €124 million and assumes no benefit from 2H24 cash flow.
11 Basic-Fit 2023 annual report.
About Impactive
Impactive Capital, LP is a $3 Billion active investment management firm based in New York. Impactive invests in high quality, attractively valued businesses and engages collaboratively with management teams and Boards to unlock shareholder value using capital allocation, operational and returns-linked ESG tools. Investing over a longer term, multi-year time horizon allows Impactive to think and invest like owners to drive long term sustainable returns for all shareholders.
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Contacts:
Walter Lee, (212) 218-8815
info@impactivecapital.com
