The Peloton Breakdown: Causes, Consequences, and Bailouts

The interactive fitness company Peloton has been recently caught in the midst of turmoil amid investors’ accusations of gross mismanagement. The claims being made focus on poor decision-making by top executives, along with the lack of a clear long-term strategy for the company’s growth and abysmal returns for Peloton’s shareholders. Peloton, on its side, tried to discard allegations of mismanagement and attributed the dissatisfying financial performance to a seasonal downturn caused by an inversion of trend following the spike in sales driven by “stay-at-home” orders (issued worldwide during the earlier phases of the COVID-19 pandemic).

Despite Peloton’s efforts to ease pressures on its top executive, a hard-hearted presentation prepared by the privately held investment firm Blackwell Capital caused the ex-CEO John Foley – who is still keeping his hold on Peloton thanks to ownership of super-voting shares – to step down and be appointed as executive chair of the company. The issues raised by Blackwell followed worrisome data from the last quarterly reports indicating a declining financial performance (Peloton’s one-year stock price was down 85% since February 2021), coupled with a loss in “active users” among Peloton’s subscriber base. Consequently, Blackwell is currently pushing towards a strategic sale of the company to a potential new acquirer to solve its existing financial and managerial problems.

In the context of its presentation, Blackwell suggested several potential acquirers for Peloton, among which companies like Apple, Amazon, and Nike. None of such companies has approached Peloton for a potential acquisition, even though Amazon and Nike started exploring the possible scenarios involving a takeover. The Financial Times also reported considerations of people informed on the matter, deeming the decision to acquire Peloton as seemingly “opportunistic” due to the recent steep decline in the company’s market value. Indeed, interest in the company appears to be driven by Peloton stocks being currently undervalued. With that in mind, a Peloton deal could provide Nike and Amazon with appealing opportunities to strengthen their revenues and acquire a strategic workforce. Similarly, a Peloton takeover would prove to be for Amazon an effort to increase its business presence in the e-fitness industry.

Despite all the hype around a potential takeover, some practical obstacles remain. First, Peloton’s valuation is far from generating consensus. Blackwell evaluates Peloton’s share price at a minimum of $65 – a figure that does not correspond to the sentiment of the rest of the market. Second, former CEO Foley appears resistant to any sale, which may pose a significant threat to the possibility of getting a deal done (Foley remains executive chair of the company and owns super-voting shares which allow him to exercise control on the company).

However, let us not rush to conclusions. Peloton announced on February 8 a series of steps as part of a comprehensive program aiming to decrease costs and result in “long-term growth, profitability, and free cash flow,” suggesting that the company intends to recover on its own before considering an acquisition. The first step in this ultimate effort to avoid selling the company to the best offeror consisted of a major internal reorganization, initiated with the appointment of ex-Spotify-and-Netflix CFO Barry McCarthy as new CEO. “Peloton is at an important juncture, and we are taking decisive steps… This restructuring program is the result of diligent planning to address key areas of the business and realign our operations so that we can execute against our growth opportunity with efficiency and discipline,” said John Foley.

Amongst the restructuring measures announced, Peloton will suspend its plans to build its own manufacturing facilities in Ohio, which should result in $60 million in restructuring capital expenditures. The construction of Peloton Output Park was indeed expected to start in summer 2021 and had initially been scheduled to open in 2023. This project would have cost an estimated $400 million. Instead, Peloton intends to minimize expenditures on in-house warehouses and delivery centers to rely mostly on third-party logistic providers. The other significant measure announced to place Peloton for sustainable growth will be job cuts of approximately 2,800 positions, the equivalent of 20% of the company’s workforce. The company said this will impact “almost all operations across almost all levels“. When implemented, these restructuring initiatives are estimated to yield around $800 million in annual run-rate cost savings in 2022,  along with a decrease in capital expenditures by approximately $150 million. If Peloton implements these changes correctly, it may be enough to keep the wheels spinning.