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What Peloton's $420M acquisition of Precor means for the fitness industry

Simeon Siegel, Managing Director and Senior Analyst at BMO Capital Markets joins Yahoo Finance Live to break down Peloton’s $420 million acquisition of fitness exercise maker Precor and the outlook for Peloton heading into 2021.

Video Transcript

MYLES UDLAND: Last night rounding out the huge year for Peloton, the company announcing an acquisition, spending $420 million to acquire Precor. That's a company that makes gym equipment either for commercial gyms, for at-home gyms. We've seen some issues with Peloton's supply chain, obviously demand for Peloton skyrocketing this year. This will presumably help the company alleviate some of that backlog.

Joining us now to talk a bit more about this deal and everything in the world of Peloton is Simeon Siegel. He's an analyst over at BMO. Simeon, always great to talk with you. So let's just start with your thoughts on this deal. Is this the kind of move you thought Peloton might make? Is it a smaller deal than you wanted them to make? And is it maybe the beginning of a larger M&A cycle for the company here?

SIMEON SIEGEL: Hey, Myles, good to see you. So you said-- you started with they spent 420 million, does it count if you spend something if your market cap goes up $7 billion because of it? I mean, it was this fascinating move--

MYLES UDLAND: I guess it's free.

SIMEON SIEGEL: They bought a company that yesterday was worth half a billion, now it's worth 7 billion. So I think there's this really interesting dynamic where the stock and the reality and what it's trying to do maybe didn't matter as much. I think it's worth asking if Peloton-- what could they have bought that wouldn't have raised their market cap right now?

So I think there's such excitement around what anything can do and where they can go that what they actually bought was probably less important, which is interesting. Now, to your question, what did they buy? It was an interesting acquisition, and interesting and confusing in trying to figure out exactly what it's going to do all wrapped up in a pretty bow.

Because one thing they were adamant about in their FAQs following the announcement was that this actually is not meant to alleviate the bottleneck that we keep hearing right now. They're going to start benefiting from this facility, they said, towards the end or before the end of 2021. But they were explicit that the investments they've already made internally are going to alleviate that bottleneck.

So everyone's talking about how Peloton has this manufacturing gap, and right now during COVID is the time to capitalize. And that's why this acquisition is faster than, let's say, laying down the brickwork and the framework for their own building. But they're being explicit that's actually not what it was for. So it's really interesting.

And I think it's a little bit confusing, actually, figuring out. I think most people probably assumed they would buy a competitor, a smaller competitor, buy the members, buy another modality, and then go from there, keep pointing to the growth. I think if you asked someone yesterday, is Peloton going to enter the gym space, are they going to be looking to supply gyms, which is one of the things that Precor does, I think that would have been a resounding no.

MYLES UDLAND: Well, so Simeon, I want to pick up on that point because you're right. I mean, it's a free deal, basically, for Peloton, if you look at it that way with the market cap they've gained. Does a stock going up this much and the market responding to a deal like this put pressure on the management team to do more with their kind of currency, whether that's with the stock, whether it's with the cash? Like, how do you think about that as an analyst?

SIMEON SIEGEL: Listen, I think we should all hope Peloton buys us, right? Forget an IPO, I mean, we're talking about all these recent IPOs that are gapping too high. Precor went up 17 times last night. Think about if they would have-- if they would have just listed public, what would that-- would their stock have done?

So I think there's an element here where I don't think we can look at this and believe that this is how it will always go, or frankly, how it should go. I think there's still this element of overexcitement in terms of the qualitative, in terms of the thematic, rather than what it actually does and, again, recognizing that-- I've had people tell me already today that they are remembering their Precor treadmill that's sitting in the basement.

Sozzi and I talk about all the time this idea that one of the things Peloton talks about is people have treadmills sitting in the basement, those are useless. That's not what you want. You want the up cycle. To an extent, they just bought that treadmill that they've been knocking in people's basements. So I think that there's no question Peloton has been doing a phenomenal job generating cash.

They had a very big cash balance. So there's been a lot of questions around what they should do with it. I think this was a little bit more surprising. And to your point, what it means going forward, what they look to pick up going forward, I think-- listen, there's probably a long list of people calling their bankers saying, get me a meeting with Peloton if this is what happens to the transaction.

BRIAN SOZZI: Simeon, is there another way to look at this that-- is this the final-- the Peloton deal, the final-- or put the final nail in the coffin of gyms? And do you think over time that Peloton just simply stops making Precor equipment, they stop supplying these gyms equipment and they just turn these facilities into cranking out Peloton treads, bikes, and who knows at some point, maybe rowing machines, and really there are no more gyms?

SIMEON SIEGEL: Yeah, I think it's a great point. So I think that the reality is if that's what they're trying to do, so if they're saying, let me buy out the competition, that actually could be a different angle where you might say, you know what, whether it's nice is not the question, but whether it makes sense, if you believe you can pay $500 million to knock out competition, then that can work. The problem with that is Precor is not the only provider of equipment to gyms. And if that business walks away, then others step up.

I spoke to a lot of big industry insiders last night in the gym space after this who are also scratching their heads, to be perfectly honest. But they were suggesting that a lot of their franchisees don't even use Precor right now. So I think that this is not a business that Precor owns. So I think that if they were to stop and just make Peloton-branded product and stop selling to others, I don't think that that hurts the other gyms. I think people step back in.

But I think it's a really interesting and important point. Because if you read the FAQs, and I'm not going to pretend to be a lawyer, they're written in a way that says, we're agreeing to honor the existing agreements, something along those lines, which makes you ask, OK, is that a way of saying once these agreements subside, we do move back and solely focus on Peloton? Which would follow the ethos of the company.

Now, conversely, Brian, I think an interesting question is, if they are intending to continue supplying gyms, is this actually a way that they're hedging their bets? Is this the way that Peloton is saying the opposite, connected fitness is here to stay, it's a phenomenal product? But by the way, our at-home fitness, sorry, is here to stay, but so are gyms. It's complimentary.

And we want to make sure that with our stock up here, we want to make sure that ultimately down the road, we still have access to this phenomenal business, that's called brick-and-mortar gyms. And this is their way into that. I actually would applaud that. I think that makes a ton of sense in terms of diversifying your risk.

The problem is, I don't think investors would applaud that. Because to your point, I think the thought here is Peloton is this meaningful disruptor. They're going to take away brick-and-mortar gyms if they're suggesting that the reality is brick-and-mortar gyms have a very important place in the ecosystem, it's a different prospect. And remember, we talk about all the time, Planet Fitness has 15 million paying members.

They have around a $5 billion market cap. Peloton has 1.5 million paying members, I don't know where they are today, $50, $55 billion market cap. So there's a big discrepancy. And I don't think it would be great for their stock to internalize that gyms are here to stay. But I think it probably would be good for their company if they can play in both sides of the spectrum.

MYLES UDLAND: Well, Simeon, it's a lot more interesting to talk about a deal like this than to just say, oh, well, you know, it's going to add 10 basis points to eBid over the next three years and call it a day. So certainly an interesting conversation that we will continue in the year ahead. Simeon Siegel with BMO, always great to get your thoughts. Have a great holiday, great New Year, and we'll talk next year.

SIMEON SIEGEL: Great to see you guys. Happy Holidays.