Forstmann Works Out Deal to Acquire 24 Hour Fitness
24 Hour Fitness Worldwide Inc., one of the nation’s largest chains of fitness clubs, said Tuesday that it agreed to be acquired by private equity firm Forstmann Little & Co. for $1.6 billion.
Based in San Ramon, Calif., privately held 24 Hour Fitness has expanded rapidly in the 22 years since its chief executive, Mark Mastrov, started with a single club using a $15,000 loan from his grandmother.
For the record:
12:00 a.m. May 5, 2005 For The Record
Los Angeles Times Thursday May 05, 2005 Home Edition Main News Part A Page 2 National Desk 1 inches; 53 words Type of Material: Correction
24 Hour Fitness -- An article in Wednesday’s Business section about the acquisition of 24 Hour Fitness Worldwide Inc. incorrectly said court cases against the fitness club that are currently in private arbitration in Orange County involved seven former employees. In fact, two of the plaintiffs are still employed by 24 Hour Fitness.
By providing 24 Hour Fitness with additional capital, the proposed purchase by Forstmann Little would further pump up its growth prospects at a time when Americans’ use of exercise clubs keeps rising, analysts said.
24 Hour Fitness operates 330 clubs in 16 states and 15 clubs in Asia, with a total membership of more than 3 million. About 180 of the company’s clubs and 1.74 million of its members are in California.
The company, with $1.1 billion in annual sales and about 17,000 employees, is the largest U.S. fitness club operator in terms of revenue, although rivals Bally Total Fitness Holding Corp. and Gold’s Gym International Inc. have more locations.
New York-based Forstmann Little, led by senior partner Theodore Forstmann, specializes in acquiring major ownership positions in companies, boosting their funding and then eventually selling those stakes for profit.
With 24 Hour Fitness, “there is substantial room to grow” both domestically and overseas, Forstmann said. “I think there’s huge potential in Asia.”
Mastrov, 47, would continue to run 24 Hour Fitness and keep an undisclosed minority interest in the company.
24 Hour Fitness sought a buyer because its major outside investor, private equity firm McCown DeLeeuw & Co. in Menlo Park, Calif., has held its stake in the chain for 11 years and was looking to cash out to reward McCown’s investors, Mastrov said. McCown owns about 34% of the company.
24 Hour Fitness “has clearly been one of the best investments we’ve ever made,” said Bob Hellman, a managing director at McCown DeLeeuw.
24 Hour Fitness has grown in tandem with overall gains in the $14-billion U.S. fitness club industry. Membership reached a record 39.4 million last year, up 9% from 36.3 million in 2002, and the number of club facilities and other workout sites climbed to a record 26,830, according to the International Health, Racquet & Sportsclub Assn.
“Fitness is growing with a vengeance,” said Jim Spring, president of Leisure Trends Group, a Boulder, Colo.-based firm that tracks the fitness industry. “Part of it has to do with concern about the obesity issue. A lot of it has to do with the aging U.S. population.”
Yet that doesn’t guarantee a club’s success, said Steve Kass, chief executive of American Leisure Corp., a New York-based firm that builds fitness facilities for hotels and other clients.
Most fitness clubs are run by small operators and the attrition rate is high, he said. The facilities and equipment are meaningless if a club doesn’t offer good service and an ambience that bring patrons back, Kass said, adding that 24 Hour Fitness excels in those areas.
“They are well-run, and it’s a professional staff,” he said.
But some 24 Hour Fitness employees beg to differ.
Last month, the company settled consolidated class-action lawsuits in which 24 employees alleged that the company had violated the state’s wage and hour laws. Under the settlement, filed in U.S. District Court in San Diego, the company will pay as much as $38 million in claims to as many as 40,000 of its current and former California employees.
Employees alleged in the suit that 24 Hour Fitness misclassified certain workers as managers, improperly denying them overtime, and failed to pay hourly workers for all hours worked.
The company didn’t admit wrongdoing and said the settlement would allow the chain “to focus on our business.”
Court cases involving seven former 24 Hour Fitness employees who are alleging similar violations are in private arbitration in Orange County, according to the plaintiffs’ attorney, Ali Parvaneh.
“We believe we’re in full compliance with the law and are putting up a vigorous defense,” company spokeswoman Allyson Savage said of the arbitration.
In addition, 24 Hour Fitness agreed last June to pay $3.5 million to settle a sexual harassment suit filed by a former Bay Area employee.
Under Mastrov, 24 Hour Fitness has grown by emphasizing health, not vanity, to recruit new members. The chain’s pitch is staying in shape, not necessarily building a buff body.
Like other health club chains, 24 Hour Fitness battles membership “churn.” The chain says it loses 2% to 3% of its members each month.
Mastrov, a 6-footer with an average build, grew up near Oakland. While in college, he used his grandmother’s loan to buy part ownership of a small fitness club in San Leandro where he worked. After noticing customers waiting outside when the club opened and seeing them reluctant to leave at night, he hit on the idea of staying open 24 hours a day.
