Peloton (PTON) Surges on M&A Speculation After Activist Investment Firm Turns Up The Heat
3:19 pm Monday, February 07th, 2022
Embattled connected fitness equipment maker Peloton (PTON) is back in the headlines, but this time, the news doesn’t revolve around eroding demand, production shutdowns, or its overall fall from grace. Rather, the company has become a potential acquisition target according to the Wall Street Journal, which reported last Friday that Amazon (AMZN) is among a group of possible suitors. Stoking the M&A fire, the Financial Times followed up with its own article, stating that Nike (NKE) may also be interested in acquiring PTON.
It’s likely not a coincidence that the rumor mill is spinning shortly after activist investment firm Blackwells Capital called upon PTON to put itself up for sale. Recall that on January 24, Blackwells sent a scathing letter to PTON’s Board of Directors, opining that the company is in worse shape now than it was prior to the pandemic. The firm also asked for the removal of CEO John Foley, listing poor forecasting ability as a key deficiency, among several other grievances.
With the stock having cratered by nearly 85% from the highs reached in early 2021, PTON is clearly in need of a shakeup, and a takeover may offer the quickest route. PTON’s current market cap of around $9.5 bln makes a transaction much more feasible, especially for a mega-cap company like AMZN that has $42.1 bln in cash on its balance sheet.
Based on the stock’s spike higher, it’s evident that investors are confident that a deal will materialize. It’s worth nothing, though, that short interest is quite high in PTON, at about 12% of the float. Therefore, today’s move is also partially fueled by shorts covering their positions. However, we also believe that the odds are in favor of PTON being acquired for the following reasons:
PTON has a large subscriber base of 2.8 mln users, and it’s still adding new users at a fast rate (+66% in Q2). It’s not hard to imagine how a company like AMZN, NKE, or Apple (AAPL) could leverage that subscriber base to create significant revenue synergy opportunities. For example, NKE could cross-promote its running shoes and athletic wear to PTON subscribers through various channels (including during workout sessions), or it could bundle its products with new subscriptions.
Although turning PTON’s fortunes around would be a major task, the companies believed to be interested in PTON have both the resources and the top-flight executive teams to execute a successful recovery. It’s also notable that running and fitness have been focal points and areas of strength for NKE since the pandemic hit while AMZN has also bolstered its exposure to health and wellness.
From a marketing perspective, NKE or AAPL’s mass appeal would help heal the many public relations hits that PTON has sustained over the past two years. The most troubling incident involved the fatal death of a child and PTON’s Tread product, an episode that the company initially denied responsibility for. Ultimately, PTON made the correct decision and issued a product recall, but the damage had already been done.
The initial costs to right-size PTON through production and personnel cuts would be substantial. Once those efforts are completed, though, a company with the size and scope of NKE could drive production and logistical efficiencies that weren’t available to PTON.
