Peloton Spins to ‘Born in the U.S.A.’

Date: Monday, December 28, 2020
Source: Wall Street Journal

Home-fitness giant Peloton PTON +1.50% wants to be homemade. That could significantly expand the flywheel of a company that already has grown at lightning speed this year amid the pandemic.

Peloton said on Monday it entered into an agreement to buy major fitness-equipment manufacturer Precor Inc. for $420 million in cash. While that price makes it Peloton’s largest acquisition ever, the difference between the value of 40-year-old commercial-fitness staple and Peloton’s current market value of $47 billion shows just how valuable home fitness has grown to be in comparison and also how frothy today’s technology market has become.

Peloton has been capitalizing on the closure of gyms and other workout facilities, growing its connected-fitness subscriptions by 137% year over year in the quarter ended Sept. 30. The fact that digital subscriptions (which don’t require Peloton hardware) grew 382% over the same period suggests the only thing limiting Peloton’s growth in the pandemic might be supply constraints. According to Peloton’s website, wait times are over 10 weeks for its most expensive bike.

The purchase of Precor will add 625,000 square feet of U.S. manufacturing capacity to Peloton’s armory, which had been limited to third-party manufacturers and facilities based in Taiwan. With the new real estate, Peloton says it plans to start manufacturing its own connected fitness devices in the U.S. by the end of next year. So while the acquisition itself won’t immediately alleviate lengthy wait times, it should at least solve the problem in the longer term—if current demand persists.

Meanwhile, Peloton has bought its way into commercial settings just as vaccines begin to roll out and the end of the pandemic comes into view. In its news release, Peloton said it expects to leverage Precor’s relationships with hotels, multifamily residences and college and corporate campuses to make its own technology more prevalent. Conspicuously missing from this list are health clubs, but the company says it will continue to honor Precor’s existing orders and service agreements.

Peloton, which recently expanded its product offerings to include two tiers of pricing for its hardware, has been working to make its products more accessible to bolster growth. In addition to helping the company churn out more of its products to its current well-off demographic, Peloton says it expects Precor’s global network and expertise to help further its own international expansion. Precor will also add about 100 research-and-development employees, which could lead to new Peloton products. KeyBanc analyst Edward Yruma notes Precor’s knowledge in strength equipment could lead to a new vertical within Peloton’s connected-fitness arsenal.

With the commercial-fitness market ravaged this year by the pandemic, it seems Peloton may have picked up Precor on the cheap. Last year, Precor owner Anta Sports was reportedly looking to sell the company for about $500 million. According to Stifel, Precor’s fitness segment was generating about $427 million in revenue as of 2018.

The question is whether that business is worth the approximately $5.7 billion in market-value appreciation the deal gave Peloton as its shares rose nearly 13% on Tuesday afternoon on the news. Peloton already had rallied more than 400% in the year to date.

Even with a smart deal, shareholders have reason to sweat.

 

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