By Thomas J. Ryan

Peloton’s Interactive’s acquisition of Precor is expected to provide a considerable boost to its manufacturing capabilities as it grapples with shortages amid surging demand for at-home fitness products. But the acquisition also means Peloton instantly gains a significant foothold in the commercial fitness space that promises to see a robust bounce-back courtesy of COVID-19 vaccines.

With Precor’s aid, one of the largest commercial fitness equipment providers in the world, Peloton also plans to make several connected fitness products in the U.S. next year. Analysts said it’s uncertain whether the Peloton brand will find its way to gyms.

“By combining our talented and committed R&D and Supply Chain teams with the incredibly capable Precor team and their decades of experience, we believe we will be able to lead the global connected fitness market in both innovation and scale,” said Peloton’s President William Lynch in a press release. “We’re looking forward to integrating the Precor team into Peloton and excited about what this means for the future of our brand and our ability to continue delivering world-class Member experiences.”

“Precor is driven to create personalized health and fitness experiences that help people live the lives they desire. That passion has led us to create highly customizable solutions running on the fitness industry’s largest commercial network,” said Rob Barker, Precor’s president. “The Precor team is excited to combine our manufacturing expertise and more than 40 years of equipment innovations with Peloton’s award-winning workout experiences to help commercial customers succeed and keep exercisers moving.”

Peloton, known for selling $2,000-plus stationary bikes equipped with screens that show subscription workout classes, has agreed to pay $420 million as part of the deal, making it Peloton’s largest acquisition. The seller is a consortium led by Chinese sportswear giant Anta Sports Products, which acquired Precor’s parent, Amer Sports, in early 2019.

The sale comes as reports arrived last November that Anta Sports was looking for a potential sale of Precor for around $500 million. Anta Sports also acquired Salomon, Arc’teryx, Peak Performance, Atomic, Suunto, Louisville Slugger, and Wilson as part of the Amer Sports acquisition.

Adding Manufacturing Muscle
Demand for Peloton’s exercise equipment has surged during the coronavirus pandemic, leading customers to wait months to deliver their bikes and treadmills. Peloton has attributed the delays to shipping logjams, particularly at ports, as its popular workout bikes ship to the U.S. from manufacturers overseas. When Peloton reported quarterly earnings in November, it warned that it would be operating under supply constraints “for the foreseeable future” due to the heightened demand for its products.

The deal — expected to close in early 2021 — gives Peloton access to Precor’s 625,000 square feet of manufacturing space in North Carolina and Washington State, allowing it to make its bikes and treadmills closer to American consumers and deliver them sooner. The U.S. facilities will join Peloton’s network of third-party manufacturers and its recently-acquired Tonic facilities in Taiwan.

“By making fitness equipment closer to U.S. consumers, Peloton will be able to deliver connected fitness products to members sooner,” the company said. In addition to its offices in the Americas, Precor has offices in Europe, the Middle East, Africa, and the Asia-Pacific region.

The deal also boosts Peloton’s product development efforts, adding nearly 100 R&D employees to its existing staff.

“By combining our talented and committed R&D and supply-chain teams with the incredibly capable Precor team and their decades of experience, we believe we will be able to lead the globally connected fitness market in both innovation and scale,” said Lynch.

The Commercial Fitness Opportunity
Finally, the deal boosts Peloton’s entry into the commercial fitness market, where Precor is a significant player.

Founded in 1980 and based outside of Seattle, WA, Precor offers products across cardio, strength, functional, group training, and connected fitness. According to the brand’s website, Precor’s professional gym equipment is used by fitness clubs, hotels, spas, and individual exercisers in over 90 countries worldwide.

Precor represents the Fitness Segment of Finland-based Amer Sports. In 2018, the latest year publicly-available figures were available, Precor had sales of €378.8 million ($460 mm), up 1 percent from €375.6 million in 2017. EBIT at Precor was down €11.9 million in 2018 against €20.1 million in 2017. The Precor business also includes Queenax functional training equipment acquired by 2015. Precor also distributes Spinner bikes through a licensing agreement.

Precor stands to benefit from Peloton’s reach, but it’s also expected to make Peloton’s products available to a wider audience through its existing relationships with hotels, college and corporate campuses and multifamily residential buildings.

Peloton’s commercial business is estimated to represent less than 2 percent of sales, and Precor officials have touted the commercial business as more of a marketing than a sales opportunity. In its annual report for its year ended June 30, Pelton wrote, “The commercial and hospitality markets represent a small percentage of sales but are important to driving trial and brand awareness. Our Bikes in hospitality locations help keep our Members riding when they travel, creating further Member engagement, loyalty and convenience. Across our markets, as of June 30, 2020, there were over 2,200 Peloton Bikes in over 1,200 hotels and resorts.”

Peloton said it will honor existing Precor orders and servicing agreements.

Rob Barker To Lead Peloton’s Commercial Unit
Precor will run as a business unit within Peloton, the company said. Barker, Precor’s CEO since 2013 and with Precor for  26 years, will hold the titles of CEO at Precor and GM at Peloton Commercial. He will report to Lynch. Precor did not hold a conference call with analysts to explore more of the financial implications.

Shares of Peloton were trading up $15.41, or 10..7 percent, to $159.80 in early afternoon trading Tuesday on the news. The stock started the year at $28.40.

The following are some analysts’ take on the merger:

»Baird Equity Research raised its price target to $165 from $150 on the news of the deal. The firm carries an “Outperform” rating.

Jonathan Komp, Baird’s analyst on Peloton, said, “We applaud the move as a good use of balance sheet capacity (vs. chasing other Connected Fitness verticals) that should bolster the supply chain (adding U.S. manufacturing/R&D), expand the TAM, and perhaps accelerate international market expansion.”

Komp described the acquisition as a “bold move” that should bolster Peloton’s domestic manufacturing capacity and R&D expertise. He said the move “marks another example of PTON strategically deploying its balance sheet advantage (>$2B cash at FQ1-end) to build internal capabilities following the 2019 acquisition of Taiwan-based manufacturer Tonic (which recently opened a new plant with 1.5M unit capacity) and the reported October 2020 purchase of IP/technology from corporate wellness-focused Peerfit.”

Precor also aligns with Peloton’s stated plans to add on-shore manufacturing and bolster R&D, Komp noted. He further sees Peloton’s TAM (total addressable market) expanding with greater access to the commercial fitness space. He said that commercial fitness equipment represents a $3.4 billion global opportunity and is expected to grow at positive low-single-digits annually pre-COVID.

Finally, Komp said that while international will likely not become a primary focus near-term for Peloton, Precor’s “strong global expertise could help to accelerate PTON’s international presence beyond the current four markets.”

»At J.P. Morgan, Doug Anmuth said the Precor acquisition would alleviate “what we expected to be the biggest risk in supply chain execution.”

“Supply chain execution has remained Peloton’s biggest challenge since demand surged during COVID-19,” wrote Anmuth in a note. “Bike wait times have remained elevated for months, as PTON faced a perfect storm of sorts with much higher-than-expected demand for the new Bike+, port congestion, warehouse closures related to COVID-19, & both West Coast fires & hurricanes. The Precor acquisition brings much-needed manufacturing capacity and should help expedite delivery times while establishing Peloton’s first domestic manufacturing presence — which management previously hinted at during 1QFY21 earnings.”

The analyst said while wait times would likely remain elevated during the next few quarters, the Precor acquisition should help reduce delivery times to U.S. consumers by the end of calendar 2021, which he viewed as “especially important” as the lower-priced Tread launches early next year. Peloton has said the market for treadmills is between two and three times as large as the exercise bike market.

Other benefits from the Precor acquisition cited are helping Peloton expand its commercial reach and providing incremental insights into exerciser behavior. Anmuth noted that Precor products record more than 20 million minutes of workouts daily through the Preva digital platform across more than 140,000 connected units in more than 13,000 facilities.

J.P. Morgan recently highlighted Peloton as its top pick in its 2021 Internet Outlook. It has an “Overweight” rating at a $145 price target. Wrote Anmuth, “We continue to believe PTON is well-positioned post-COVID-19, with home fitness here to stay & multiple catalysts in 2021.”

»Stifel analyst Scott Devitt raised his firm’s price target on Peloton to $160 from $144 on the news of the deal and kept his “Buy” rating. The analyst sees its added manufacturing capacity and R&D capabilities as important steps in reducing delivery times for Peloton’s growing user base.

Devitt said in a note, “Supply constraints have limited growth in recent quarters as the company has struggled to manufacture and ship product within its normal delivery windows to meet the elevated demand, with supply backlog further compounded by congestion at ports and warehouse closures related to COVID-19. We believe today’s acquisition is an important step in increasing the company’s manufacturing capabilities and reducing delivery times for its growing user base.”

»Youssef Squali, an analyst at Truist, highlighted the potential benefits establishing on-shore production will have in resolving supply chain hurdles and the opportunity to produce connected fitness products.

“We view the acquisition positively as it looks to meet heightened demand and help resolve some supply-chain issues overseas, in addition to leveraging Precor’s existing commercial relationships (hotels, multifamily, corporate campuses) to improve PTON’s distribution within that segment of the market,” Squali wrote in a note.

Truist has a “Buy” rating at a $145 price target.

»Goldman Sachs’ Heath Terry wrote in a note, “We view the pending acquisition primarily as an avenue to expand manufacturing capacity in light of recent supply chain pressure, though the company does not expect U.S. production of connected fitness products until late CY 2021. Along with the opening of the company’s Shin Ji facility, we would expect the acquisition, once completed, to solidify the company’s lead in connected fitness and support diversity in the product portfolio and end markets.”

Terry, who has a $162 price target and a “Neutral” rating on Peloton, also expects the acquisition to support R&D and expedite penetration into the commercial markets’ select areas. Terry stated, “Peloton will utilize Precor’s existing commercial relationships in channels such as hospitality, multifamily residences, corporations, and college campuses to accelerate growth in commercial verticals, though notably, the company did not explicitly mention commercial health & fitness clubs, a key Precor segment, as a channel it would continue to leverage. Precor will continue to service its global network.”

Terry said that Peloton noted that it’s premature to discuss how content distribution may change, but the analyst also saw an opportunity for Peloton class content to become available on Precor fitness equipment eventually. Terry wrote, “Given Precor’s existing fitness presence, which includes one billion+ annual workouts on 140,000 connected fitness units in over 13,000 facilities and over one hundred countries, we expect that Peloton could leverage this infrastructure and international presence to increase brand reach over time.”

Photo courtesy Precor