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 advantage of an opportunity to purchase the Lexington Club at what Paul Couturier thought was a very attractive price. He was surprised that HDC’s ownership of the Lexington Club seemed to be reducing the company’s offering price and was mulling his alternatives.
HDC owned nine health and fitness clubs in the Greater Boston area. It also operated three other facilities under management contracts, including Shad Hall at the Harvard Business School. As Exhibits 1 and 2 demonstrate, the Company had realized rapid growth between 1994 and 1999, almost doubling its revenue and tripling its operating margin. Much of HDC’s success came from its three largest clubs located in Boston suburbs near the Route 128 beltway. Each of these clubs offered a range of services, including fitness, personal training, tennis, swimming, and childcare. The Wellesley Center, located in Wellesley, MA, was a 75,000 square foot facility that had over 4500 members. Its projected annual revenue was in excess of $6.3 million for the year 2000. The Lexington Club, located in Lexington, MA, was a 62,000 square foot facility that had over 4000 members with projected annual revenue in excess of $3.9 million for the year 2000. The Colonial Club, located in Lynnfield, MA near the intersection of Routes 128 and 95, was a 55,000 square foot facility that had over 2500 members with projected annual revenue in excess of $2.7 million for the year 2000. The Company continued to expand during 1999, adding the Franklin Club in Franklin, MA and the Andover Club in Andover, MA. The Andover Club required a substantial capital investment to convert it from a tennis-only facility into a multi-purpose facility. The Company anticipated that the new facilities would not be profitable for about two years after their acquisition. The startup costs of the two new facilities were expected to reduce operating profits by about $400,000 in the year 2000. ________________________________________________________________________________________________________________ Professor Richard S. Ruback prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
Health Development Corporation
The Opportunity to Purchase the Lexington Club Real Estate
Until the spring of 1999, HDC leased the building and 9 acres of land that housed the Lexington Club. The lease terms of health clubs are generally linked to the revenue generated by the facility. HDC’s lease payments for the Lexington Club were about 23.5% of its revenue. With anticipated revenue of about $3.9 million in the year 2000, the...
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