2023-06-21 03:55:43 ET
Summary
- Shares of Mark Wahlberg-backed fitness franchisor F45 Training Holdings have hit new all-time lows in recent weeks.
- After a consortium led by key stakeholder Kennedy Lewis Management LP provided new secured debt financing in February, a previously proposed acquisition seems to be off the table.
- After last week's surprise resignation of the company's interim CFO, the company is not likely to become current in its regulatory filings anytime soon.
- With the business apparently still bleeding cash and the company at the mercy of secured lenders, it is hard to get excited about F45 Training Holdings' prospects.
- At least, in my opinion, chapter 11 remains the most likely scenario at this point. Given the company's substantial indebtedness, a recovery for existing shareholders in bankruptcy doesn't seem likely. With an outright acquisition at a material premium to prevailing share prices increasingly unlikely, investors should consider selling existing positions and moving on.
Note:
I have covered F45 Training Holdings Inc. ( FXLV ) previously, so investors should view this as an update to my earlier article on the company.
While shares of Mark Wahlberg-backed fitness franchisor F45 Training Holdings or "F45" are down almost 50% since I initiated coverage with a " Strong Sell " rating last year, my expectation for the ailing company to file for bankruptcy before the end of 2022 apparently hasn't played out.
In fact, my advice to exit the shares turned out to be bad mistake after one of the company's largest stakeholders, Kennedy Lewis Management LP ("Kennedy Lewis"), purchased more than 3.5 million shares on the open market between August 18 and August 29, 2022 and subsequently delivered a non-binding proposal to acquire the company at $4.00 in cash.
As a result, shares advanced to a new multi-month high of $3.73 on October 6, 2022 but started to retreat following a dismal Q3 report on November 14 and subsequent resignation of the company's CFO after pocketing a $2.4 million cash retention bonus along with accelerated vesting of all outstanding and unvested equity awards simply for staying with F45 through October 15, 2022.
On February 15, the company announced a new $90 million subordinated debt facility provided by a consortium of existing investors and led by affiliates of Kennedy Lewis.
The New Facility has a five-and-a-half-year term, with interest to be paid in kind. Net proceeds will be used for, among other things, general corporate purposes and a partial paydown of the Company’s existing Senior Secured Revolving Credit Facility with JP Morgan Chase Bank, N.A. (the “JPM Facility”). Concurrent with the closing of the New Facility and the partial paydown, the Company amended the JPM Facility to be structured as a $70 million senior secured facility with a two-year term, comprising a $68 million term loan and a $2 million revolving credit facility.
The company also appointed four new independent directors to the board and named an interim CFO.
In addition, F45 updated on Kennedy Lewis' unsolicited proposal to acquire the company:
As an update to the previously announced formation of a Special Committee to review and evaluate the unsolicited proposal F45 received from Kennedy Lewis and other strategic alternatives, the Special Committee paused its review and evaluation as the Board focused on securing this financing to address F45’s liquidity needs.
The Company has not received anything further from Kennedy Lewis with respect to its prior proposal or a revised proposal. In the event Kennedy Lewis engages with the Company on its proposal, including any revision thereof, the Board will consider such proposal at the appropriate time and will act in the best interests of the Company and its shareholders in accordance with its fiduciary duties.
Kennedy Lewis also provided an update on the proposal:
In the Proposal, the Adviser noted that it was prepared to provide financing to the Issuer if the Issuer so required, and this financing has been consummated in response to the Issuer’s requirements. The Reporting Persons continue to believe that the Issuer would be in a stronger position to maximize its resources and realize strategic value that enhances its operations and supports its stakeholders as a private company. The Reporting Persons may engage with the Issuer with respect to the Proposal and the terms thereof, including with respect to potential modifications to the Proposal based upon a further evaluation of the Issuer’s current financial results and condition and developments since the date of the Proposal.
With the business being in dismal condition and the new credit facility having substantially improved Kennedy Lewis' ranking in the company's capital structure, there's apparently not much sense in outright acquiring F45 at an almost 500% premium to prevailing share prices.
Please note that F45 has not yet filed its annual report on form 10-K for the year 2022 as well as its first quarter 2023 report on form 10-Q which constitutes an event of default under the company's credit facilities.
F45 Training Holdings Inc. has determined that it is unable (...) to file its Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2023 within the time period prescribed, as its focus is on the preparation, finalization and audit and review of the Company’s financial statements to be included in its Annual Report on Form 10-K for the year ended December 31, 2022.
The delay in filing the 2022 Annual Report is a consequence of the time required by the Company and its independent registered public accounting firm to complete certain items with respect to its financial statement preparation and review processes, including management’s assessment of the effectiveness of the Company’s internal controls over financial reporting for the year covered by the 2022 Annual Report. In addition, previously disclosed transitions in the Company’s executive leadership team, including the recent appointment of its Interim Chief Financial Officer and new Chief Executive Officer, have contributed to the delay in filing the 2022 10-K.
While the company managed to obtain waivers from its lenders, last week's resignation of F45's interim CFO will almost certainly result in the company missing out on the recently extended June 30 deadline.
Moreover, F45 remains out of compliance with the NYSE's continued listing standards:
The NYSE informed the Company that, under NYSE rules, the Company has six months from the Form 10-K due date of March 31, 2023 to regain compliance with the NYSE listing standards at any time prior to that date by filing the Form 10-K with the SEC. The NYSE further noted that, if the Company fails to file the Form 10-K within the six-month period, the NYSE may grant, at its sole discretion, an extension of up to six additional months for the Company to regain compliance, depending on the specific circumstances. The notice from the NYSE also noted that the NYSE may nevertheless commence delisting proceedings at any time if it deems that the circumstances warrant.
Please note that the company recorded almost $100 million in negative free cash flow during the first nine months of 2022 but following a restructuring in July, management targeted $10 million of quarterly free cash flow generation starting in Q4/2022.
Apparently, this target has been missed by a wide margin as otherwise there would have been no need for a new credit facility in February " to address F45’s liquidity needs".
Bottom Line
With the business seemingly still bleeding cash and the company at the mercy of secured lenders, even with shares trading at all-time lows, it is hard to get excited about F45 Training Holdings Inc.'s prospects at this point.
Under a best case scenario, the company will be taken private by Kennedy Lewis at a substantial premium to prevailing share prices but this doesn't seem to be a likely outcome anymore after a consortium led by Kennedy Lewis became F45's largest secured lender in February.
At least in my opinion, a restructuring of the company's debt obligations under chapter 11 continues to be the most likely outcome for F45 with the first lien facility provided by a division of JPMorgan Chase & Co. ( JPM ) either being reinstated or refinanced and the consortium led by Kennedy Lewis becoming the new owners of the business upon emergence.
Given the company's substantial indebtedness, a recovery for existing shareholders in bankruptcy doesn't seem likely.
With an outright acquisition at a material premium to prevailing share prices increasingly unlikely, investors should consider selling existing positions and moving on.
For further details see:
F45 Training Holdings: Bankruptcy Might Be In The Cards - Sell