Dave Whelan, founder of JJB Sports, has bought the company’s gym business for about £83.4 million (€89.5m-$121.4m) through his company Dave Whelan Sports Ltd.. Whelan, who sold his stake in JJB Sports in 2007, said he will rename the chain of fitness clubs DW Fitness.
The scope of the acquisition covers JJB’s fitness clubs, the attached stores, the Cardiff MiFit fitness club and retail store, certain committed fitness club sites, and related stock. Indicating that it would have faced bankruptcy proceedings without this cash injection, JJB said it will use the proceeds initially to reduce its debt but ultimately to fund short-term working capital requirements.
Uncertainty over the British retail chain’s future has led many suppliers to delay shipments to its remaining stores, creating disruptions in the supply chain that affected their sales, according to a spokesman. During the 10-week period from Jan. 12 to March 23, JJB’s retail sales fell by 22.5 percent on a same-store basis, partially offset by a 6.7 percent increase in the fitness clubs’ revenues. This led to an overall sales drop for the group of 18.5 percent on a comparable basis. The gross margin for this period was 3.5 percentage points lower than in 2008 as the company worked to eliminate excess inventories.
For the year ended Jan. 25, the company expects to report a pre-tax loss of £5 million to £10 million (€10.7m-$14.6m) before exceptional items and before any one-time costs related to its banking facilities. Its lifestyle division, now in administration, should incur losses of about £15 million (€16.1m-$21.8m).
The purchase agreement with Whelan came just in time to allow JJB Sports to pay its quarterly rents to the owners of its stores, which were due last Wednesday. One the other hand, JJB said it will go ahead and propose a “company voluntary arrangement” (CVA) to reduce the rental claims of the landlords of about 140 retail stores that JJB has decide to close, and to temporarily change the terms of the leases of the 250-odd remaining stores that are still open, so as to make monthly rent payments instead of quarterly ones. Meetings between creditors and shareholders to decide on the arrangement are expected to be held the week of April 20.
Pending approval of the CVA, JJB is further extending through June 17 a standstill agreement with its banks, Barclays, Lloyds (formerly HBOS) and Kaupthing but if they aren’t satisfied with the progress of negotiations, they can move up the expiration date.
JJB is also proposing new funding arrangements through a short-term £25 million (€26.8m-$36.4m) term loan with Barclays and a medium-term £25 million working capital facility with Lloyds, along with the possibility of issuing warrants to Lloyds to subscribe for ordinary shares up to a maximum of 5 percent of the company’s current share capital. The new credit facilities would take effect only after the CVA is completed. Once they’re available, Barclays and Lloyds will be granted security over JJB’s assets. However, JJB is warning that it will probably be unable to continue as a going concern, and that administrators, receivers or liquidators would then have to be appointed for the group unless the CVA is accepted and the new funding is made available.
JJB is also making changes to its board. It is finally dismissing Chris Ronnie, the ousted chief executive, who has been charged with “gross misconduct,” following a disciplinary hearing held on March 23. In addition JJB’s finance director, David Madeley, has announced that he will resign effective May 31. Richard Manning will take up the position of legal director and company secretary.
Wild rumors have been circulating about Ronnie’s dealings in the market. His suspension from the company took place after Sir David Jones was named executive chairman and Peter Williams because executive director of the company. Williams will be in charge of finance until a replacement is found for Madeley.
Ronnie acquired an interest in the company’s shares in June 2007, but then on Jen. 13 he revealed that these shares were held by a joint venture that sold off almost 69 million ordinary shares, representing about 27.5 percent of the current total voting rights, for 5 pence apiece. Their share price has since risen above 14 pence. Ronnie was suspended in January, and JJB announced after that he had been dismissed because of gross misconduct.
In announcing the latest moves this week, Sir David Jones said he wants JJB to go ahead with its “Serious About Sport” strategy, in an attempt to revitalize its core retail business. He said all of the changes made this week were a first step toward securing JJB’s long-term future, but he noted that they still require the approval of the company’s unsecured creditors and shareholders.
As part of the agreement, JJB Sports cannot own or operate a fitness club in the U.K. for three years after the deal is completed, and JJB and Whelan cannot try to recruit each other’s senior employees for one year.
JJB’s fitness club business consists of 55 clubs in the U.K. and Ireland, with about 228,600 members. Whelan is buying 53 of these; the clubs in Dundalk and Limerick, Ireland, are not part of the sale. Of the 53 clubs he is buying, 52 have on-site retail stores. He is also taking over leases or agreements to lease for 10 planned clubs.
The fitness clubs business had assets of about £119.8 million (€128.5m-$174.4m) on July 27, 2008. For the year that ended Jan. 27, 2008, that segment had revenues of £138.7 million (€148.8m-$201.9m) and operating profit of £22.9 million (€24.6m-$33.3m), before central costs for the affiliated retail stores. Employees and management of the fitness business are expected to continue under the new ownership. Barry Aspinall will remain as the managing director; he joined JJB in 1993 and has run the fitness clubs since they were founded in 1998.
JJB’s initial standstill agreement with its lenders was due to expire on March 17, was was then extended until March 24. The banks said that unless a definitive agreement was made to sell the fitness business by then, no further extensions would be available. If no deal had been struck, all outstanding amounts under the existing debt facilities, or about £50.5 million (€54.2m-$73.5m), would have become due and payable.
In addition, the United Kingdom Listing Authority had to grant a waiver, available only for companies in serious financial difficulty, to issue a circular and obtain shareholder approval for the sale.
Going forward, JJB has several possible strategies for generating further working capital, including a reduction in capital expenditures on the stores, the negotiation of better terms of trade, the sale and leaseback of all or parts of the company’s headquarters, and the disposal of other business units, such as the remaining two fitness centers in Ireland or brands that JJB doesn’t want to further develop.
