Billion Dollars To Bust: Health & Tennis Corp. Of America

In Business Blunder, Intelligent Fanatic by Sean Iddings1 Comment

Have you watched Shark Tank recently? An 83 year-old, who looked 50, along with a younger partner were pitching a new glove for snowboarding. That wasn’t the most interesting part. The older fellow, named Donahue “Don” Wildman, said he built and sold a multi-billion dollar revenue business.

He did. That company was Health & Tennis Corporation of America.

Don and his partner Roy Zurkowski took over a bankrupt chain of fitness centers, then named Vic Tanny, in 1962. They grew the chain of various brands [Vic Tanny, Jack LaLanne, Chicago Health & Racquetball, Holiday Health, etc.] to 240 facilities and maintained market dominance in the fitness revolution until the 1980s.

The two men sold the business to casino and game operator Bally Manufacturing Corporation in 1983 for $137.4 million with various earn-outs. Don stayed on to run the fitness centers as chairman and CEO until the early 1990s and grew the company to over 300 locations.

Bad luck and later mismanagement led to the demise of what became Bally’s Total Fitness. It was actually a similar repeat of what led to Vic Tanny’s bankruptcy in the first place. Bally’s went bankrupt in 2007 and by October 2016, the brand name has been erased from the fitness industry.

Don Wildman and Roy Zurkowski built an intelligent fanatic led organization. I will highlight their good fortune and the programs they put in place to dominate the fitness revolution of the 70s and 80s.

Under Bally’s corporate umbrella and without the men’s leadership, the company floundered. There was some bad luck involved, too. I will describe the lessons to be learned from the first bankruptcy of Vic Tanny and the eventual extinction of Bally’s Total Fitness.

Vic Tanny posing in one of his gyms

Vic Tanny — Henry Ford of Gyms

Victor A. Iannidinardo, who later became known as Vic Tanny, revolutionized the fitness movement in the 1940s and 1950s.

The son of an Italian immigrant living in Rochester, NY, Vic began lifting weights with his brother in their family’s garage. It was a broomstick and sandbag affair.

Back in the pre-1930 era there were few if any gyms as weightlifting was yet to be popular. Vic saw an opportunity to charge others in the neighborhood 5 cents to utilize their facility.

After briefly opening a gym in Rochester, he moved with family to California in the mid-1930s. Vic Tanny would experiment with the business model. He was able to make gyms affordable to the working class with what he called a “budget plan” or membership fees payable on an installment plan. He also innovated from broomsticks and sandbags into machine weights.

Vic Tanny’s gyms were highly successful and he expanded nationwide to 100 facilities by 1961. Tanny was lucky enough to get an offer to sell his company to automobile manufacturer Studebaker Corp., but unfortunately he turned down the deal. When you are leading, or own, a company growing gangbusters with rapid expansion and a debt laden balance sheet, get out when the price is good. Do not let greed overcome you.

Rapid expansion, of course, was the gym’s downfall. Debt piled up, back taxes went unpaid and unions tried to organize workers.

Then Wildman & Zurkowski stepped up.

Don Wildman & Roy Zurkowski

Don Wildman at 80 [Mark Von Holden, Getty Images]

Don Wildman had been working his way up Vic Tanny’s gyms for ten years. A high school dropout and a medic in the Korean War, Wildman always made the best of a bad situation.

“I tried to lead by example. Unlike these MBAs who never worked out, I had to look the part. When I started out, it was a selling business — and a muscle-head who totally believed was a better salesman. I guess because my father was a minister, I naturally ended up doing the same thing: changing lives.” — Don Wildman

He and Roy were lucky. Creditors contacted Don and Roy to take over eight Vic Tanny gyms. Don would take over the operations in Chicago and Roy would run the operations in Detroit. They formed the holding company Health & Tennis Corporation of America in 1962 to own all of the different branded facilities and refused to brand all of the gyms under one name.

Roy Zurkowski [The New York Times]

Health & Tennis Corporation of America was unique. They kept Vic Tanny’s membership innovation and drove traffic with ads featuring celebrities. Below is one of their ads with Cher.

Wildman and Zurkowski understood the power of incentives in human behavior. They paid high salaries throughout the organization and paid very aggressive bonuses. By the 1980s a club manager could earn between $30,000 and $50,000. Area supervisors could make up to $60,000, assistant area directors up to $100,000 and up to $1 million for area directors. Inflation adjusted those numbers would be high in today’s gym industry.

The company also set up national and regional contests amongst their clubs. Employees would compete to get the most in revenues and maintain the highest levels of cleanliness. Large bonuses could be won. Wildman recalled, in a 1985 Chicago Tribune article, one cleanliness inspection of a New York club. The club manager sure of his club’s cleanliness got on all fours and proceeded to lick the tile alongside the gym pool.

Wildman and Zurkowski would acquire clubs with an eye for top talent. They had heard of this one club who’s saleswoman won a revenue contest after she phoned in a bomb threat that emptied a rival club in that chain. Health & Tennis quickly acquired that chain and made sure to keep that saleswoman after the acquisition.

Bally Manufacturing Era

Bally Manufacturing was a dominant slot machine manufacturer and casino operator in Atlantic City and later Las Vegas. The company had seen growth in its Midway Manufacturing division with the advent of arcade video games of the late 70s and early 80s. They owned the licenses for Space Invaders, Pac-Man and Ms. Pac-Man.

Flush with cash, Bally decided it was time to make some acquisitions. They purchased Six Flags amusement park and shortly after Health & Tennis Corporation of America.

Bally Manufacturing was smart, in the beginning. In structuring the buyout of Health & Tennis Corp, they incentivized Don and Roy to stay on with high earn outs if they could achieve a thirty percent increase in profits. There were a few initials blips, but under Don’s leadership the company went from $400 million in revenue in the mid 1980s to $1.8 billion in the early 1990s.

Where did Bally go wrong? Debt fueled expansion. From 1986 to 1990 the company added $1 billion in debt. The company tried to sell its health club chain to an investor group at $500 million in Oct 1987. The stock market crashed and the deal fell through.

After new management in the 1992, Bally Total Fitness, the renamed fitness club, fell further into the abyss. Management did not hold up the level’s of excellence built by Don and Roy. There also was little done to continue innovation to help stay ahead of the competition. Bally held the title of largest coast to coast network of gyms until the late 1990s.

The company was spun off from the casino operation in 1996 with a tidy $376 million debt load, negative earnings and nearly $50 million interest expense. The company had been consistently unprofitable for the past three years. It was a game of equity dilution [from 15 million to 27.5 million] and debt increases [up to $600 million] in the late 90s. The share price went from $7 to the low $30s as the company turned to profitability but that did not last long.

To help with growth the company resorted to desperate measures. The debt load continued to climb to over $700 million. To help spur growth, Bally started offering free memberships with hidden clauses for three-year commitments at high prices. Other dirty practices ensued and to this day there are complaints from previous customers after the company has gone bankrupt and pieces have been sold off. Read more complaints here.

Not surprisingly, Bally Total Fitness went the way of the Dodo bird.

Conclusion

Companies that can fund their growth internally without debt have more time to get lucky. It also gives them the ability to make a few mistakes, whether within or outside their control. Debt magnifies returns and allows a company to grow quickly in the short term. It also magnifies mistakes and shortens the duration of getting lucky.

Don Wildman and Roy Zurkowski took advantage of a lucky situation and rode a wave. They utilized efficient leadership methods and were careful in growth. They were smart to get out when they did.

Had they not sold to Bally Manufacturing we wonder if they would have made the same mistakes.

What are some of your experiences with debt filled companies? Let us know in the comments section.

Learn More About Don Wildman, Roy Zurkowski & Bally’s:

Vic Tanny, First Gym Chain Developer, Dies

Roy Zurkowski Obituary

Sweat Keeps ‘Em Fiscally Fit Bally Unit Has Muscle, Health [Chicago Tribune, Nov 17, 1985]

Health & Tennis Might Go Public Bally Considering Stock Offering [Chicago Tribune, Feb 1983]

It’s Hard Work Being Mr. Lucky

Health-club Sale to Pump $500 Million Into Bally

Moneyline [USA TODAY, Oct 15, 1990]

Bally Totally Unfit

Bally’s Bully Tactics Backfire

About the Author

Sean Iddings

Twitter

Sean is the founder of Unconventional Capital Wisdom, a registered investment advisor in New York State seeking to invest in high quality microcap companies led by intelligent fanatics. He is a member of MicroCapClub and writes about investments, entrepreneurship, and leadership on a number of blogs and publications. Sean is also a long distance runner having completed five marathons across the globe and a jazz/rock guitarist. He lives outside Ithaca, NY with his wife and daughter.

Comments

  1. See, in addition to the exposure the glove thing company got from Shark Tank, I think Don wanted to find a good partner for his protege.

    The sharks saw it too. They saw Don as a very smart businessman, but Jake not so much which they admitted to Don that it was one of the reasons why they think it’s risky to invest in the glove company (plus the high competition in the apparel industry). I’m sure they’re aware of what happened to Bally and how it happened once Don left.

    That glove company might be thriving now with Don still around, but what if Don left forever. Sure he’s a fit guy, fitter than even a 20 year old. But mother nature doesn’t care about age or fitness… What if they’ve infused those straight equity and Don ‘left’ in the middle of it, and they’re left with Jake. They could already see the company go down the drain like Bally.

    I don’t know whether it’s intended or not but the way the showrunners edit their segment, you can see how a seasoned multi-million dollar businessman like Don do business, and the rest of the Shark Tank hopefuls do business. I think it’s a good segment for future Shark Tank hopefuls to learn from. From the open (their initial seeking is not traditional Shark Tank), to the negotiations (their counter is not traditional Shark Tank), to the closing (decisive and look at where they do the handshake). Nothing is “ordinary” Shark Tank affair.

    Good segment all around. A lot of lessons to be learned.

Leave a Comment