Peloton’s $420m Acquisition of Precor Inc
Deal Overview:
· Announcement date: 21 December 2020
· Industry: Fitness/Consumer
· Deal value: $420m
· Deal consideration: To be announced
· Acquirer advisors: Fenwick & West LLP
· Target advisors: Citi and Kirkland & Ellis LLP
Company Details: PTON:NSQ
· Founded: 2015
· HQ: New York, United States
· Market cap: $34.17 billion
· EV: $32.42 billion
· LTM EV/Revenue: 17.8
· TTM P/E : 231.7
Peloton is an interactive fitness platform provider, at the epicentre of technology, media and fitness, championing high-end fitness equipment connecting its community to technology-enabled fitness and the streaming of bespoke, instructor-led classes. Its main segments include connected fitness products, consisting of its Bike and Tread, and Peloton-branded apparel. Peloton’s customer base has expanded by 125% this past year alone, cultivating a network of 4.4 million members. Peloton has a growing number of retail showrooms spanning the US, UK, Canada and Germany.
Peloton, hailed as a tech stock, emerged as a lockdown winner: enjoying a stellar performance with its share price up 325% during 2020. Revenues increased 99.6% from FY2019 with its subscription revenue growth outpacing membership figures. This figure grew by 133% during 2020, alluding to increased customer retention rates. During FY2020, Peloton’s cash flows from financing activities topped $1.24 billion equating to 67.9% of revenue while generating $376.3 million in cash from its operations and investing a total of $741.3 million, bolstering its growth.
In Q4 of 2020, Peloton’s sales spiked 172%, supported by the fact that gyms and sports facilities were forced to remain shut. Concerns surround whether this growth is sustainable in 2021 and beyond, as the economy begins to re-open again. Arguably, consumer behaviour has been dramatically altered by the pandemic and recent trends within health and fitness are likely to remain, in some form, when life resumes a sense of normalcy. CEO John Foley cites Peloton to be “the future of fitness independent of when we get back to normal,” supported by six years of triple-digit growth in subscribers, indicative of a business that has been expanding long before the pandemic.
Company Details: Precor Inc
· Founded: 1980
· HQ: Greater Seattle, WA
· Revenue (2020): $190 million
Precor is one of the largest suppliers of commercial fitness equipment and has been operating for more than 40 years, serving over 100 countries worldwide. Precor supplies its premium fitness equipment, including rowing machine and elliptical machines, to gyms, hotels and health clubs and has thereby experienced a decline in revenue as a result of these sectors being forced to close and Precor not being able to engage with their primary customers.
While the pandemic has adversely affected Precor’s bottom line, they have taken a range of measures to expand their presence into alternative market segments. Precor has gained traction with consumers through offering online home workouts, entirely free of charge, and creating a set of free resources for gym operators. In 2020 alone, one billion workouts were recorded on its fitness cloud Preva, yielding more than 140,000 connected units spanning across 13,000 facilities.
Strategic Rationale
Manufacturing Agility
During 2020, Peloton experienced exponential growth and struggled to keep up with demand; extended delivery times meant that it lost out on crucial business. Acquiring Precor will provide Peloton with the operational flexibility and capability to support its continued growth in the fitness industry whilst tapping into a far wider market, connecting with customers from across the globe. Having manufacturers of fitness equipment in closer proximity to its US customers, Peloton will be able to sizeably reduce the delivery time for its connected fitness products.
The acquisition will add 625,000 square feet of U.S. manufacturing capacity combined with in-house tooling and fabrication, product development, and quality assurance capabilities located in North Carolina and Washington. Peloton will be able to exert control over the entire production process, increasing its scale whilst maintaining a high degree of product quality.
Harnessing Precor’s global customer base
Precor has built a strong customer base, with decades of experience and expertise in scaling consumer-focused business. When the deal closes, Precor will make Peloton’s connected fitness products available to their broad customer base while continuing to serve its global network. Precor plans to make the Peloton immersive experience accessible to a wider range of consumers through its established relationship with hotels, sports clubs, multifamily residences and college and corporate campuses.
A Continuum of Innovation
For Peloton to stay ahead of the curve it needs to continually innovate, connecting its community to the latest technology and fully immersive experiences. The acquisition will combine a team of nearly 100 dedicated R&D employees with Peloton’s highly-skilled team. With decades of experience between them, the two team plans to work closely together, generating synergies in the design and creation of its connected fitness experience.
Risks
Athleisure: A Perfect fit
With pressure from competitor athletic brands such as Soulcycle who are also investing heavily in apparel, Peloton needs to demonstrate to investors that they can tap into this market, worth an estimated $181 billion, gaining meaningful sources of revenue from every aspect of their business. Currently, Peloton apparel sales yield 2% of revenues albeit sales have risen sharply from $2.6 million in 2017 to $14.7 million in 2019. Peloton have deployed various growth strategies to increase apparel sales including collaborations with brands such as Outdoor Voices and Lululemon. Apparel is a segment of the fitness industry that provide Peloton with the scope to fortify ties with its existing members whilst also enticing new members to their broader services.
Streaming Service: the future of Peloton?
Since 2017, Peloton’s revenue has increased by 734% but in order to fulfil its aspirations of becoming a streaming service, Peloton will need to increase its subscription-base, whose revenue stands at 20%. The vast majority of Peloton’s revenue is still being generated through the sales of its fitness equipment.
Peloton faces tough competition in the subscription space, competing with the likes of Amazon and Netflix. Planet Fitness, a closer competitor, has 4x Peloton’s customer base yet it was established more than a decade earlier. Through continued investment in advertising and R&D, strengthening their brand, Peloton can steadily increase its customer base but it will, crucially, need to tap into a broader range of demographics and geographies. Peloton is pushing ahead with its expansive plans having announced, on 8 March 2021, their launch into the Australian market. This marks their penetration into the Asia Pacific region, moving them one step closer to becoming a globally-recognised brand.
Peloton’s Core Market
The affluent market segment represents Peloton’s core market; households whose annual income exceeds $100k appealing to customers that are typically time-strapped, looking for a convenient and efficient fitness solution. However, biking as a sport is become increasingly popular among the less affluent. The share of the bike market from consumers with household incomes surpassing $100k per year has fallen by 17% since FY2014.
While Peloton may view this emerging trend as an opportunity to interact with a new segment of the market, they are less likely to achieve the same level of popularity with its current premium pricing model as it has achieved with the more affluent market. As Peloton strives to be more competitive within this fast-growing segment, it may be forced to lower its prices, thereby hurting profit margins, or risk shrinking its available market, which makes achieving high-growth rates all the more difficult. Peloton is unlikely to lower its prices, but it is striving to make financing easier: it has launched the provision of 0% APR financing over three years, making their high-end exercise bikes more accessible.
Inflation: What this means for our beloved tech stocks
The benchmark 10-year US Treasury yields hit a one-year high of 1.614%, sending shockwaves across global markets. The recent rise in yields means that bonds offer competitive returns for investors with respect to equities, and other risky investments, combined with the fact that they lower companies’ future free cash flows, hampering their frothy valuations. There has been a stark flight of capital from growth to value in recent weeks, with investors turning to commodities and financials.
The richly-valued NASDAQ composite plummeted by 8.3% since its Feb 12 close, marking an 11% drop from its height. Peloton was not immune from the record sell-off whose shares entered into bear market territory, sliding 32% in a matter of weeks. Peloton shares regained some of their momentum, up 14.47% at the close of the trading day on 9 March.
While US Treasury Secretary Janet Yellen calmed markets, and yields cooling to 1.1%, high-growth tech stocks are in for a bumpy ride; investors should tread with caution.
By Dinah Wolf, Cass Business School
