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.
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%. 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. 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. 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. 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.
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. 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,
As of the date of this letter, Impactive owns more than 7.7 million shares.