Finding a buyer for Peloton will not be an easy ride

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Peloton Interactive’s resistance level just went up to 100.

The home-fitness company recently received a letter from investor Blackwells Capital demanding that it fire chief executive officer John Foley and find a way to sell itself.

Peloton shares soared during the early days of the pandemic, but have slumped as people around the world return to the office.

Last week, Peloton shares dipped below their initial public offering price of $US29 after a string of problems, including a safety recall of its treadmill and $US1 billion ($1.4 billion) revenue downgrade to its outlook last November. There’s certainly a case to be made for change at the company. But finding the right buyer and an appropriate valuation, given the loss-making group’s gyrating share price, will be far from an easy ride.

When it comes to a suitor, private equity could be one source of interest. A buyout fund with deep pockets could try to return Peloton to its previous growth levels away from the glare of quarterly earnings reports. With the string of bad news recently, that would be particularly welcome.

Peloton may also suit a technology or streaming group. Despite its recent woes, interest in home fitness hasn’t gone away. If anything, the appetite for health and wellness products is stronger than ever. Peloton would bring a monthly subscription, providing another avenue to tie in customers, as well as data to sell more services.

Alternatively, Peloton could appeal to an apparel brand, such as Nike, Adidas or Lululemon Athletica. Sportswear groups are currently seeking to build communities to attract and retain customers. That’s why many have launched their own workout apps, for example. Peloton would provide access to 6 million engaged and largely affluent members.

Sure, Lululemon’s purchase of fitness startup Mirror has been more challenging than expected — the group downgraded its outlook for the business last month. But Peloton would provide not only an additional revenue stream, but more ways to connect to customers and generate the sort of data that could translate into selling more cycling and running gear.

One of the problems Peloton has discovered is that people want to go back to exercising away from home. That begs the question of whether there’s a deal to be done with a leisure or hospitality group or even a mall operator. Imagine Peloton studios in vacant mall spaces. Peloton is already targeting this area for growth: It acquired fitness-equipment manufacturer Precor for $US420 million in 2020. But there’s scope to develop this business further.

Although Peloton would be a big and ambitious bet for any acquirer — its market capitalisation is still about $US9 billion — a fitness apparel group probably has the most to gain, given the convergence between physical products, experiences and technology.

Blackwells Capital is also calling for Peloton CEO and co-founder John Foley to be fired.Credit:AP

If a buyer can be found, the next hurdle will be agreeing on a price. The stock reached a high of $US167.42 just over a year ago. But that level is clearly out of the question now.

A 50 per cent premium to the current price would be about $US40 per share, not far from the 12-month price target of $US49, according to Bloomberg data. That’s well below the close to $US100 the shares were trading at before the cut to its revenue forecast last November, but ahead of the current level of about $US27.

If Peloton’s management can put an end to its mishaps, revive growth and improve profitability, then it may be able to convince investors it has an independent future.

If not, buyers are already circling elsewhere in the consumer sector. Activist Macellum Advisors has been urging Kohl’s to consider a sale, and the department store chain has received interest from two suitors, sending its shares up more than 30 per cent on Monday.

If a fusty brick-and-mortar retailer can spark a bidding war, why not a whizzy home-workout brand?

Bloomberg

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