Activist company

Peloton’s CEO may be out, but he’s still in control and can make the sale harder

Amid a flurry of Peloton changes – including a new chief executive, new board members and the laying off of 2,800 employees – there’s one major thing that has remained exactly the same: John Foley is always in command.

The co-founder, who now swaps his title of CEO for that of executive chairman, still holds the same amount of shares he held on Monday. Together with other members of the management team, including two other co-founders, they control approximately 80% of the voting rights. That means Foley still remains the biggest obstacle to a potential sale and may refuse to explore a deal with rumored likes Nike, Amazon and Apple.

“It’s their decision,” said Cowen & Co. analyst John Blackledge, referring to Foley’s team.

During the company’s earnings call on Tuesday morning, Foley said he hoped the changes would help ease investor concerns. The CEO job, which had belonged to Foley since he started the company a decade ago, went to Barry McCarthy, former chief financial officer of Spotify and Netflix.

“The announcement this morning that we are hiring a smart, talented and experienced CEO to bolster our leadership team is one of the many things we are doing to show our commitment that this is not about John Foley or high voting stock,” Foley said. . “This is about what is best for all shareholders, of which I am one.”

He noted there would be no changes to the voting structure, a move that ensures he and other company insiders continue to control its fate – and could continue to manage it in a way autonomous.

“The management and board changes, along with the cost reduction, definitely suggest that they plan to be independent for a while longer,” said Adam Crisafulli, founder of Vital Knowledge, a consulting firm. financial information and analysis.

“Today’s announcement, in our view, reduces the likelihood of a strategic takeover,” Baird analyst Jonathan Komp wrote in a note to clients.

Activist investor Blackwells Capital, which lobbied Peloton to remove Foley and put itself up for sale, appears to view the executive reshuffle as little more than window dressing. “Peloton CEO John Foley appointing himself executive chairman and hiring a new CEO does not address any of Peloton’s investor concerns,” Jason Aintabi, Blackwells chief investment officer, said in a statement this morning. The company continues to call for the immediate sale of the business and names more than a dozen potential suitors in a 65-page presentation it released on Tuesday.

Still, Foley believes Peloton still has broad prospects ahead of it and said he was delighted to “associate closely” with the new CEO. “Our long-term thesis on home fitness is unchanged,” Foley said in November. Peloton currently has about 2.8 million subscribers, a fraction of the 100 million homes in the United States and abroad that it expects to add as customers in the coming years.

If Foley sells now, he will have to accept a price that has fallen significantly from its highs. The company is worth around $10 billion, down from a peak of $50 billion. His personal fortune, mostly tied to company stock, has plummeted to $450 million from $1.5 billion at the start of the pandemic.

There’s also always the question of just how desirable Peloton is to suitors. “I don’t see why anyone needs to buy this company,” Crisafulli said. “It’s a notoriously tough low-margin business with a long upgrade cycle.”

The company derives most of its revenue from the sale of bicycles and treadmills, a physical product that requires significant manufacturing and supply chain investment. It said on Tuesday it was working to improve the economics of its hardware business, with plans to scrap a new manufacturing plant in Ohio. It will also begin to outsource more of its warehousing and delivery operations, such as having third parties handle 60% of its deliveries, up from 40% previously.

These efforts are aimed at improving profitability, after posting losses of $439 million on revenue of $1.1 billion last quarter. The company has struggled to forecast demand leading to a glut of inventory and reports it has suspended production, further fueling investor concerns that the home fitness craze will die down as Americans emerge from the pandemic.

The image of the brand has also been bruised lately. His bikes have been featured in not one but two fictional heart attack scenes on television, and he has been criticized for the way he handled a recall of his treadmills following the death of a child and dozens of injuries. Peloton did not respond to a request for comment.

Tech companies already face antitrust scrutiny. Reaching a deal to buy Peloton would invite regulators to do more research. Amazon, for example, is awaiting clearance for its $8.4 billion acquisition of MGM. Nvidia has just canceled a $40 billion acquisition of another chipmaker after it was blocked by regulators. The Senate also considered legislation that would prevent tech companies from promoting their own products on their platforms.

“The question is: do you really want to have a headache right now?” said Crisafulli.

Amazon could use shopping as an entry into health and fitness, but Peloton probably serves no purpose as a customer acquisition tool. It already has 200 million Prime subscribers and plenty of insight into their shopping habits. “Do they need more data? I don’t know if they need more data,” Blackledge said.

Apple has always avoided acquisitions, preferring to launch its own products. Nike, another rumored suitor, hasn’t shown much interest in the hardware. Its most recent acquisition was for a company called NTWRK that makes virtual goods for the metaverse.

Staying independent has worked well for companies like Netflix, which faced pressure from activist investor Carl Icahn to merge with a bigger tech company in 2012, refused, and became a $175 billion market cap company. dollars.

However, the company has more often been compared to GoPro and Fitbit, which also make connected fitness devices, and foundered as standalone public companies after facing growth issues.

Peloton might regret not selling now, said Dan Ives, an analyst at Wedbush. “To do this as a stand-alone business, they would face challenges similar to Kilimanjaro. If they decide not to sell, bidders could buy it 30% to 40% cheaper with another missed run.