The Rise and Fall of F45’s IPO: What Went Wrong?

Bryce: [00:00:31] Welcome to get started investing a podcast where we help you learn to invest in 15 minutes or less. Each episode we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you're joining us for the very first time, welcome. We strongly recommend that you scroll up and start at episode one. And just a reminder before we get going, we are not experts, we're not financial professionals. Ron and I are not licenced. We're here learning just like you, and nothing on this podcast should be taken as advice. Please don't take investing advice from a podcast. But with that said, my name is Bryce. As always, I'm joined by my equity buddy, Ren. How you going? [00:01:07][36.2]

Alec: [00:01:07] I'm very good. Bryce. We've got 15 minutes and you took two with the intro, so let's get into it. Today we're talking about a 45 yea fitness empire. Well started in Sydney, Australia. [00:01:18][11.4]

Bryce: [00:01:19] Yes, Paddington Australia. Ambitions of being a global gym. [00:01:22][3.0]

Alec: [00:01:23] Oh, no, no. It is a global gym. It is. You can't deny that. That's fair. There's one right near the office, the new office we've moved into. I've thought about going. I haven't pulled the trigger yet, but the reason we're talking about them is because they were a hot IPO in 2020 oh, 2020. [00:01:43][20.1]

Bryce: [00:01:43] 120 just before COVID, I'm pretty sure. [00:01:46][2.4]

Alec: [00:01:46] No, no, in KOVALENKO. [00:01:47][0.5]

Bryce: [00:01:47] More than 2020. [00:01:48][0.3]

Alec: [00:01:49] Okay. Yeah, that whole COVID period is a bit of a blur. It is somewhere in that COVID period. They were a hot IPO and they're now not so hot. So that's the business story we want to talk about today and then we'll talk about some lessons around IPO's generally. [00:02:05][15.9]

Bryce: [00:02:06] So I'm just going to fact check it was 2021. [00:02:07][1.1]

Alec: [00:02:08] Okay. Yeah, love that. Live, live fact check. Yes. So let's get into the story. It opened in 2021. It is for people who are unfamiliar IPO. Yes, initial public offering. [00:02:19][10.7]

Bryce: [00:02:20] Nice. I was just going to do a jargon buster. It's a private jargon buster. [00:02:23][3.3]

Alec: [00:02:23] This guy is firing on all cylinders today. [00:02:25][1.6]

Bryce: [00:02:25] It's just it's when a private company becomes publicly listed. And you and I ran by it on the stock exchange. [00:02:31][5.8]

Alec: [00:02:31] Yes. Now it went public at $16 a share. [00:02:35][4.0]

Bryce: [00:02:36] Yeah. [00:02:36][0.0]

Alec: [00:02:37] What happened after that? [00:02:38][0.9]

Bryce: [00:02:38] Well, Brent, since then, it's plummeted 79%. Yeah, in a big way. [00:02:42][3.6]

Alec: [00:02:42] Yeah. [00:02:42][0.0]

Bryce: [00:02:44] It was backed by celebrity Mark Wahlberg, and since then, it has been a tale of ambition that couldn't be met. Essentially, the stock, the business has come to a grinding halt. [00:02:56][12.4]

Alec: [00:02:56] It's very Shakespearean of a story of ambition that couldn't be met. Yeah, actually, really proud of it. So hit me with some of the some of the key details he told me about Mark Wahlberg. Marky Mark. [00:03:10][13.4]

Bryce: [00:03:10] Yes. So as you said, it took off with great fanfare, but then it all kind of turned sour celebrity back on, Mark Wahlberg sold 1.1 million shares in March and then another bunch in April for a total of $12.2 million. But when I said the stock has plummeted 79%, if he was still to hold those today, that they would be only worth $2.6 million. [00:03:32][21.3]

Alec: [00:03:33] So yes, he did all right. Yeah, yeah, yeah, he did. [00:03:35][2.2]

Bryce: [00:03:35] Alright. Three weeks ago, the CEO and founder Adam Gilchrist, not the cricketer, has resigned. [00:03:40][5.4]

Alec: [00:03:42] That is like his permanent prefix. I know Art Post takes whatever is after a name. Yeah. Every article Adam Gilchrist brackets not the cricket. [00:03:50][8.1]

Bryce: [00:03:52] So the CEO has resigned. The company also announced they were going to fire 110 employees and slashed expenses. 300 US franchise sales have also been cancelled due to the collapse of financing and another 300 are reportedly in doubt. Now we know with a business like this it is all about franchise growth. [00:04:11][19.7]

Alec: [00:04:12] Just for people who are unfamiliar. You see a whole bunch of 40 fives. There's thousands around the world at 45, the parent company doesn't own them all. Yeah, there are individual people that go to a 45 and buy the the right to credit 45 and they get the branding and they get all the IP and the equipment and stuff like that. Same with Macca's. Like the Macca's parent company doesn't own every McDonalds. There's individual investors that have bought a franchise that's 45 business model as well, but there are less franchises than were originally projected. [00:04:41][29.6]

Bryce: [00:04:42] Absolutely. And it doesn't stop there. Last week it came out. They are now facing five lawsuits. Yes, five. [00:04:49][7.3]

Alec: [00:04:50] Yeah. Need to take that last one with a grain of salt. There are five law firms like investor rights law firms in the US trying to get as many 45 investors as possible to do class action lawsuits. But that doesn't mean that they've done anything wrong. It just means that the world is incredibly litigious and these lawyers can smell a chance. Yeah, sure. But. But it will. We will get to the lessons and you know that there is a lesson there. But I think the long and the short of it is price. In 2021, 45 had grand ambitions. I remember. We spoke about them on in a summer series episode, and they were going to had, you know, global expansion plans like thousands of new F45 gyms around the world. But then they were also going to do like a seniors gym. Do you remember that? And that was like something for students as well. And they had all these different, like, offshoots, university campuses. Yeah, yeah. [00:05:47][57.7]

Bryce: [00:05:48] It was all there in front of you as an investor, enticing, if you would, you know, thinking that, oh, I've been 20, 45. I get it. I love it. They're going public. Big fanfare. Mark Wahlberg backing it. Yeah. You can see how it could be an appealing investment. [00:06:02][14.6]

Alec: [00:06:03] Yes. And then the funding market turned and that's a story that's happened in 2022. So it's been a lot harder to raise money and a lot of unprofitable companies have seen their share price fall. So it's also it's harder to borrow money and then it's harder to sell shares to raise money as well. And F45 has been caught up with that. Like everyone else you were saying it's down 79%. It's actually down 79% this year. It's down about 85% from when it opened. It's tough. And then the story goes from bad to worse, say, or getting swept out, firing employees, now facing lawsuits. So that's the story. Let's take a quick break. And then we've got three lessons around IPOs that we've taken from this story and that we want to share. So quick break and then let's get into the lessons. [00:06:51][48.2]

Speaker 2: [00:06:55] Fitness franchise at 45 is reeling in the. [00:06:58][2.5]

Alec: [00:06:58] Wake of co-founder. [00:06:58][0.4]

Speaker 2: [00:06:59] Adam Gilchrist stepping down from his role as CEO and chairman of the board. The right back gym chain at 45 is under pressure after reporting a quarterly loss of $35 million in announcing the implementation of a cost reduction plan. Everyone to hear that from a Start-Up. All right. [00:07:13][14.3]

Bryce: [00:07:14] Ren. We usually do one lesson, but this story is jam packed, so we're going to try and get through three in the second half. [00:07:18][5.0]

Alec: [00:07:19] So I'm going to so we're going to hit 15 minutes. So Bryce what is the first lesson? [00:07:22][3.2]

Bryce: [00:07:23] Ren The first takeaway for me is that IPO's carry risk. It doesn't mean that they're never successful, but they do come with risk. Yes, yeah, they are. [00:07:32][9.6]

Alec: [00:07:33] The moment in time where you've got the least information about a company because they have just becoming public. So they share like the last year or two. But you know, they don't have the track record of public market reporting that a lot of other companies do. They don't have the scrutiny of being a public company for a long time. [00:07:53][20.3]

Bryce: [00:07:53] And when you're saying they only share the last year or two, you mean a financial information of the workings of the company? [00:07:59][5.3]

Alec: [00:07:59] Everything. Yeah, yeah, yeah. So just by the nature of them just becoming a public company, they've you've just got less information about them. But also the nature of an IPO is that early investors, founders, early employees will sell their shares into an IPO. So it's just a moment where people who are early are trying to cash out. And so the nature of that moment is they will have made the business look as good as possible and they will make the projections look as good as possible because they want to cash out for as much as possible. And we should be very clear, most IPOs, a lot of those people still hold the founders and stuff still hold shares. Yeah, but it's just a moment where you're like, you're putting lipstick on the pig and getting ready to go to the bull. And how many metaphors can we use here? And so you just the first thing is just be aware what an IPO is. It's the moment of like maximum hype and excitement and, you know, some of that, a lot of that is real. But as much of that as possible is manufactured. [00:08:59][60.3]

Bryce: [00:09:00] Yeah. And we know that when expectations and hype are not met on the share market, then we often say that the price of companies fall and that leads to the next one, which the lesson is to be very careful of IPO projections when you've just outlined that it is a point where companies are trying to make themselves look the best possible. They're going to put out juicy forecasts for revenue for growth that in some instances are never met. And so if you're buying in on that and investing based on projections, not knowing how the companies have performed over the last few years, it again comes with some risks. So be. [00:09:34][33.7]

Alec: [00:09:34] Careful. So let's put some details on that. From 45. [00:09:36][2.6]

Speaker 2: [00:09:37] What should be the appeal to Wall Street? Should we be thinking about how well the franchisees do or should be thinking about your same store sales and how you're doing competing and your raw cost? And because I do find it confusing, the message is a little confusing. [00:09:52][14.6]

Alec: [00:09:52] They forecast in their IPO projections that they were going to sell 1500 franchises this year, that now targeting 350 banks. They projected 275 million USD in revenue for the year. They're now projecting 120 million, so less than half. So they reported adjusted EBITDA, which is like an adjusted profit metric. [00:10:17][24.8]

Bryce: [00:10:18] Just jargon to the yeah. [00:10:19][1.2]

Alec: [00:10:20] They projected 100 million USD. That's they're now projecting 25 million USD and they projected between 50 and 60 million in free cash flow. They're now projecting 10 million. [00:10:35][14.4]

Bryce: [00:10:35] So to break down the jargon there, essentially what has happened is all the projections that they've come out and said they would hit, they're now revising, in some cases down 75% or a quarter of what they said they were going to be doing. Yeah. And as a result, we've seen the market as punish them, stock down 89%. [00:10:52][16.7]

Alec: [00:10:53] Yeah, exactly. And they would say that the market changed. And so the facts changed, the facts change and the projections change with it. And that that might be completely fair, but it's just it's just to be, again, be mindful that what an IPO is, is this moment where there's excitement and hype and the business is looking as good as possible and the projections are rosy. And so it's all investments are risky, but IPOs have that like additional layer of risk on top of it. [00:11:20][27.4]

Bryce: [00:11:20] Yeah. So third lesson again, when people know about the company who on the inside starts selling, watch out. [00:11:28][7.5]

Alec: [00:11:28] Yeah. Now there are plenty of reasons insiders sell shares the same or early investors. They might just need cash because they want to buy a house because they need to send their kids to a private school. Because, yeah, musk has a loss because there's other reasons. There's plenty of reasons, people. So we need to be very clear about that. But when people are selling, it's important to just think about why they're selling. The fact that Mark Wahlberg sold an early investor, the big promoter of. 45, sold in March and April, was something that people should have been like, watch out. Yeah. Because he was key to the excitement and the hype when they IPO. [00:12:02][34.5]

Bryce: [00:12:03] He was the hot man. [00:12:03][0.5]

Alec: [00:12:04] He was the hype and he was a good hype man. So, you know, he could have been selling because he wanted to finance a new movie about a Boston cop. Yeah, but it also could be because he was getting out of the company because he didn't believe in it. [00:12:16][12.9]

Bryce: [00:12:17] Yeah. Yeah. So, red flag. Watch out to find out if people are selling it. [00:12:21][3.9]

Alec: [00:12:21] For red flag. An orange flag. And so. Yeah, yeah, yeah. [00:12:24][2.8]

Bryce: [00:12:24] Pay attention. [00:12:24][0.2]

Alec: [00:12:25] Yeah. Yeah. All right. What's your fourth lesson? [00:12:27][1.8]

Bryce: [00:12:27] Well, my fourth lesson is I've been stung a couple of times trying to get into IPO's. And for me now it's just a patient's game. It's like if I love the company. For example, Uber, Airbnb, they all had big IPOs that I think eventually had a bit of a flop because we know the hype there. There's no harm in waiting. Two, three, four months. Let it all settle and then make your investment decision. [00:12:51][24.0]

Alec: [00:12:52] We haven't spoken about how to get into IPO's in this episode. If you do want to know, we can maybe do another episode or we can talk about it later, but it's getting easier and easier to actually like physically put your money into it. But I think what you just said is the really important takeaway. Just because it's easier to do it doesn't mean you should. And I think the other thing is you get swept up in the excitement and you're like, I'm going to put as much money as possible in the IPO because it's so exciting and I don't want to miss it. And this is the chance it's going public, the only time it's going public. But your point around, patience, I mean, it's a point that holds wherever we are in investing, you can put a little bit in and then if it drops, you can put a little bit more. Or if you stop believing in the company or they miss all their projections, you can take that money and put it into something else. So yeah, I think that's a good overall lesson. Nice patience crisis. [00:13:44][52.3]

Bryce: [00:13:45] So four lessons there in an IPO carries a level of risk. So watch out. Be careful of the IPO projections that companies give when people on the inside or in the know start selling orange flag and have patience. Don't deploy all your capital at once and get carried away in the hype. So plenty happening there. Then we have hit our 15 minutes. I hope people have been able to take some action out of that episode. It's been great to chat as always and we'll pick it up with another lesson based on a business world story. [00:14:14][29.2]

Alec: [00:14:15] Yes next week sounds good. And buy tickets to invest through. [00:14:15][0.0]

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