Health Development Corporation Essay

1962 Words Jun 28th, 2013 8 Pages
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
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In 1999, HDC had the option to purchase the Lexington Club real estate for $6.5 million The Company had not purchased real estate in the past for two reasons. First, as a small privately held company, HDC preferred to use its limited capital to add, expand, or enhance clubs. Second, leasing property allowed the company to reduce its risk by keeping real estate costs proportional to revenue. In the case of the Lexington property, however, HDC management determined that the lease payments were substantially greater than the costs of owning the real estate. After attempting unsuccessfully to renegotiate the lease payments downward, HDC decided to purchase the Lexington Club property. The Company financed the Lexington Club purchase with $750,000 of excess cash and a mortgage for $5,750,000 at an interest rate of 8.75%.

The Offers to Purchase
Kaufman & Company solicited bids for HDC in February 2000. In exchange for signing a confidentiality agreement, potential bidders received an information memorandum that provided a detailed description of the Company, its operations, and its financial results. Potential bidders were also given the opportunity to visit the health clubs and to interview management. Five potential buyers submitted bids. HDC, with the advice of Kaufman & Co., decided to focus on the bid by Town Sports International (TSI). TSI had a large share of the New York health club market, with 67 clubs, but only five clubs in the Boston market. TSI
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