Life Time Fitness (LTM, Financial), a gym operator which featured among the top new buys of David Einhorn (Trades, Portfolio) last quarter, has entered into a definitive merger agreement with Leonard Green & Partners and TPG to get acquired for $72.10 per share. The deal values the company at more than $4 billion. In August last year, the company had initiated a process to explore a potential conversion of real estate assets into a Real Estate Investment Trust (REIT). However, management got a better deal for shareholders with outright sale.
Life Time Fitness is undergoing a turnaround and its management is taking several steps to grow its revenues. The most notable ones include improving retention, introducing new offerings, and opening more centers. Throughout the company, management is providing training to its team members to improve client retention rates. In the third quarter last year, the company saw its first reduction in year-over-year attrition since fourth quarter of 2011. While it was a modest 10 basis points improvement, the company is expecting its magnitude to increase meaningfully in 2015. Over the next few years, the company's goal was to reduce customer attrition rate to 30%.
In addition to reducing attrition and improving retention, the company is also focusing on growing “in-center” revenues by increasing its product and services offerings, and encouraging it members to use its services through LT BUCK$ affinity program. In the third quarter of fiscal 2014, the company's in-center revenue grew by 11%, led by kids activities, personal training and its small but fast-growing tennis business.
New centers have been another important growth driver for the company and the company has increased its number of centers from 84 in 2009 to 112 at the end of third quarter 2014. Going forward, the company is expected to continue its expansion spree. Looking at its development pipeline, the company is on track to open 6 new centers in 2015, including centers in 2 new markets: Boston and Sacramento. For 2016 and 2017, the company expects of deliver similar number of clubs.
The deal values Life Time Fitness at 21.85 times FY2015 EPS estimates which is reasonable given the company's high single digit growth rate.
