As we approach Christmas day, it is the 22nd of December 2020 as I write this, the shareholder’s of Precor, a company that has been actively seeking a buyer for months, got an unexpected gift under the tree; a $420 Million deal to be acquired by Peloton.
At first blush the deal makes sense right ? According to the public announcements Peloton gets more access to the commercial market, which should bounce back courtesy of COVID-19 vaccines, and the deal will greatly bolster manufacturing capacity and equipment that can be connected to its digital services. Precor also gives Peloton a “hybrid” fitness opportunity. Precor equipment has presence in gyms and fitness centers and Peloton is betting that brick-and-mortar and at home exercise won't be a zero sum game. Make a note of that last thought.
"Technology providers will always happily skim the cream off the top if you let them"
The good news for Precor, where I have many friends involved in the past and present, is that unlike with private equity further significant cuts in staff are unlikely in the near-term and of course the Precor shareholders made out very well given the fact that the commercial fitness equipment business is in the toilet right now. Congrats to the Precor team for pulling this off.
So while the champagne corks are popping and everything seems fantastic let’s look under the hood and ask what does this really mean ?
First you should note that Technogym shares fell about 4% following the news. The Italian fitness equipment business is valued at $1.782 Billion US, nearly 28 times earnings, while Nautilus shares gained over 4% on the news with their company having a market cap of $590 Million US or about 18 times earnings.
All of this while Peloton shares jumped in overnight trading 11.68% to a market cap of over $46 Billion US. Really? $46 Billion dollars for an estimated 2.5 million subscribers which essentially means each subscriber is worth $18,400. That’s right, Peloton as of this morning is worth almost 80 Nautilus companies and 25 Technogym companies.
I have been blowing holes in the Peloton stock story for a while now and I am not alone. Look, being pro digital fitness and a fan of a business model like Peloton does not mean one should be blind to the real world financial dynamics that just do not pass the smell test. Peloton does not pass the valuation smell test.
"Peloton as of this morning is worth almost 80 Nautilus companies and 25 Technogym companies."
There are really 2 key dynamics that make Peloton an inherently much lower than current multiple earnings company:
There are nearly an unlimited number of competitors from Apple to Instagram ;
The turnover rate of the subscriptions is inherently high and unsustainable; and
Trends come and go in fitness all of the time and this one will too.
Read more details on these points from Dana Bowler’s write up in Seeking Alpha here.
More than Peloton’s CEO’s claiming they will reach 100 million subscribers when they only have 2.5 million today and more than a stock market fueled by speculation and a free wheeling central bank, what the Peloton story will do in the long-term is more damaging than good when the bubble bursts; and it will burst. Remember Under Armour’s acquisition spree of digital apps from 2013- 2015 ? How did that work out ? Very badly; the stock plummeted over the years since. Anytime this happens it takes a while for the markets to get the taste out of their mouths and I am afraid a lot of better valued opportunities pay the price for it. That is how market bubbles work and this is a fine example of one.
In the case of Peloton, with a valuation they have as of today, the Precor acquisition cost them almost nothing. In fact the surge in the stock price more than made up for the value of the acquisition so the logic remains sound; in the near-term.
Notwithstanding the above points on over valuation here are the facts : According to Harvard Business Review between 70% - 90% of mergers and acquisitions do not work.
Beyond the intrigue that this transaction might raise in the fitness industry in general, for gyms, health clubs, and fitness facilities, particularly independent ones, there is something more to keep in mind; think about what some of your fitness equipment suppliers are looking to become now. Where are your supplier businesses seeking to evolve to now that a large commercial supplier is owned by a first to consumer business model ?
Two years ago when Nerio Alessandri, the founder of Technogym, flew in various investors to his headquarters in Emilia-Romagna, Italy, it was to paint a vision of the future that was direct to consumers. That 15 million people are already registered on the Mywellness cloud digital platform is not an accident. He is not alone and who can blame him? With technologies enabling a lower barrier to entry on content distribution and consumer engagement eco-systems and with competitors like Amazon and Apple entering the fray, these businesses look at Peloton and other digital service providers with envy and now they have one of their former brethren in Precor in bed with them. As commercial equipment has become more commoditized who can be surprised for their reconsidering how they can compete.
The challenge that has been emerging in brick-in-mortar fitness businesses for some time is the lack of investment in technology ecosystems that enable seamless service of members in club and out of club to better grow the marketplace. As with hotel and airline reservation systems in the past which jumped in and monetized consumers independently from the suppliers of services, hotels and airlines who did not keep up with Internet booking trends, gyms and health clubs face further commoditization of their services if they let others get in the way of their member relationships. What do you think Peloton is going to try and do to keep that valuation in the stratosphere ? They will need more subscriber customers.
Technology providers will always happily skim the cream off the top if you let them and what the Peloton acquisition of Precor reflects is a blurring line of competition for the consumer’s wallet. As I wrote previously “Peloton is betting that brick-and-mortar and at home exercise won't be a zero sum game.”
When I ask the question "what does the acquisition of Precor by Peloton mean ?" it means the battle for the consumer is being escalated on many fronts and thus the risks and rewards of competing will require a rejection of old school mindsets and assumptions and instead an embrace of a new industry that is emerging before our very eyes.
About the author
Bryan O’Rourke is CEO and Chairman of Vedere Ventures, which has invested in a portfolio of brands in Europe, the Americas, and Asia. He is an advisor to multiple global companies, sits on the board of IHRSA and serves as the President of the Fitness Industry Technology Council. Check out his Fitness + Technology Podcast or feel free to reach out to him Bryan O'Rourke .