9-200-049
REV: JANUARY 9, 2003

RICHARD S. RUBACK

Health Development Corporation
Mr. Paul Couturier, the CEO of Health Development Corporation (HDC), was negotiating the sale of his company in the spring of 2000. The Company, which owned and managed health clubs in the Greater Boston area, had retained a local investment firm, Kaufman & Co., to solicit bids. They received several bids from national or regional health club companies seeking to establish themselves in the Boston area. The bids were lower than expected, largely because of the way the bidding companies considered HDC’s ownership of Lexington Club’s real estate. Like most health clubs, HDC generally leased their health club real estate but in 1999, HDC had taken …show more content…

Nevertheless, HDC was disappointed with the initial offer price and hoped that negotiations would substantially improve the offer. In negotiations, TSI revealed that it viewed the Lexington purchase as a negative, and would have been willing to pay the same or a higher multiple of EBITDA if HDC did not own the real estate. HDC argued that the Lexington purchase was clearly a value increasing decision, and therefore should increase the equity value of the Company. The math, however, undeniably supported TSI’s position. The valuation projected HDC’s year 2000 earnings before taxes, interest, depreciation and amortization (EBITDA). A multiple of about five times was applied to the EBITDA to determine the total enterprise value, and the debt of the Company was subtracted to determine the equity value of the Company. Exhibit 3 shows that the real estate purchase reduced excess cash by $750,000 and added $5.75 million in debt. This $6.5 million was greater than five times the resulting increase in EBITDA. Paul Couturier and Kaufman & Company began to assess alternative structures. One choice was to sell the Lexington real estate to another entity that would in turn lease it back to the potential buyer. According to TSI’s operating model, which set benchmark operating cost ratios, the projected lease payment for the Lexington Club