Peloton Closes $1B of 0% Senior Note Offering

Investment Analysis Clubs Saul’s Investing Discussions
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https://investor.onepeloton.com/news-releases/news-release-d…

Here’s a list of notes from Peloton’s recent senior note offering.

  • $1B Gross Total ($875M + full exercise of $125M). Net proceeds to be $976.8M.
  • 0% Interest with notes fully maturing in 5 years (Feb 11th, 2026).
  • Notes are convertible at a initial conversion price of $239.23/share (~55% increase from current stock price).
  • Peloton used $81.3M to pay the capped call transaction.
  • Peloton intends to use the remainder of the net proceeds from the offering for general corporate purposes, which may include working capital, capital expenditures, including for the construction or expansion of facilities, and investments in and acquisitions of other companies, products or technologies that Peloton may identify in the future.
  • Not attached in the article, but Precor Acquisition was $420M and, in the earnings call, they pledged $100M to air freight and expedited ocean freight.
  • They initially started by asking for $600M senior note offerings the beginning of the week (Feb 8th) before finally closing at $1B at the end of the week.
  • Free Cash Flow was $128M last quarter ($198M op cash flow - $70M capex)

I am still quite the novice when it comes to analyzing securities, but I see this as a huge win for Peloton as they essentially paid $81.3M to get $976.8M over the next five years. It’s also a win for investors as it pushes dilution down the line when the stock should in theory be higher. I don’t see many negatives with this move other than it being debt. It will be interesting to see what they do with the additional capital they raised. The initial $600M offering makes sense for the shipping costs and the acquisition, but it will be interesting to see what the additional funds will be used for. The stock jumped 5.59% up to $154.67/share after the 0% interest news came out.

Does anyone have an additional thoughts/comments on this move by Peloton? Is there anything I’m overlooking in regards to this senior note offering?

-Redeemed
Long PTON 3%

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0% 5 year convertible loan is about as good of terms as any loan (not given to government insiders, and corrupt government programs) that I have ever seen. This is particularly so as multiple brokerages have come out and stated Peloton is “overvalued” and thus sell ratings.

The shares have underperformed year to date by quite a bit. Like saying Tom Brady underperformed throughout part of the season for a few games…but this may be due to hedging that goes on in such transactions. Underwriters go short to hedge the loan (don’t ask me the technicals as to why, they just do).

Peloton is not digital SaaS. They sell expensive hardware linked with software (like Apple many will say). Thus their growth is not all recurring. Have to sell more bikes every year. However, that is not all there is with Peloton.

Peloton Tread has just come out in Britain and Canada and will be in the U.S. beginning in May. The quarter ends in July, so will be part of the next fiscal quarter its contributions to revenue.

Management is already talking up how above expectation demand has been in Britain and Canada for the tread. Treadmills are a larger market than bikes. Thus, point being, if the Tread becomes another killer product it will contribute to another year or two (or longer) of hyper-growth. Peloton also has clothing line that is doing well (but has a very long way to go to be material) and is talking about dominating in the strength category. They are not sure and not stating if they will do that through additional hardware or not. Seems they will have additional product for strength and they will see how it goes.

The Precor acquisition puts Peloton into the commercial market and one can easily see how demand for the commercial equipment, branded and connected to Peloton software, may increase demand as people who travel, or go to college, or go to the gym, may want to use their accounts on commercial bikes as well. A Peloton branded bike is more valuable than just a bike, or anyone else’s bike as Peloton has the subscribers. It is also another mechanism to introduce new customers to the phenomenon of something that makes people not just exercise, but actually love to exercise. It is like getting kids to love their broccoli or the like in my mind.

In any event, have not even stated the international growth potential, despite the hardware component, there is real opportunity for years of growth here and this financing are investors finding a place to move $1 billion at 0% interest in a non-recourse loan (I assume it is not linked to any assets other than the share price going up). Anyone would take such money if offered to them. It says a lot about perception of the business. I am just laying out reasons the shares have for continual growth moving forward.

This said, I have large profits in a tax deferred account on Peloton, so I can freely move in and out with no ramifications. I did nothing for a long time. Given the underperformance year to date however (that has been substantial) I switched it out for better moving stocks like FVRR and AXON. This financing may be at least part of the reason for the underperformance, so now it wants to draw me back in again…shall see. The market loves a killer product and there is reason to think Tread will be another winner. Speculative reason, mostly from the comments of management based upon the rollouts of the new product in Britain and Canada, and that this will translate to the United States.

Tinker

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0% 5 year convertible loan is about as good of terms as any loan (not given to government insiders, and corrupt government programs) that I have ever seen.

FWIW, CEO John Foley tweeted this is the “best 5 year convertible terms in history of the convert market!” (His exclamation mark, not mine.)

DOCU pulled in $690M at 0% last month, but that was a 3-year term (https://investor.docusign.com/investors/press-releases/press…).

Lots of money sloshing around right now. I’m curious to see how these companies put it to use.

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whats is crazy about this deal is not only its 0% interest, it converts at 55% higher than current share price…

So these investors placed $875M in this company to buy shares at $239 in future… instead of buying shared today at ~$150… ofcourse, these investors don’t share downside in the stock price… but their money can sit idle for upto 5 years with a possibility of no return… wow…

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Tinker/Stocknovice, I very much appreciate your thoughts on this topic.

I totally agree, nilvest; it seems pretty crazy on the face of it. While there could be underlying information that we are not privy to, my best guess is the debtor is trying to find some sort of stability in a bear bond market.

With rates as low as they are currently, I’m sure investors are trying to find safe havens rather than (I’m assuming) full equity exposure. Senior notes, from my research, seem to have typically lower rates than other forms of debt as they have less liability of not getting paid since they have first priority if bankruptcy was to happen. The investor/debtor in this instance is trying to preserve capital rather than have returns as their top priority (again, my outside perspective).

The debtor is essentially locking in a 9% CAGR over 5 years with Peloton; and I don’t see why they would ever agree to this deal unless they were relatively bullish on Peloton. Obviously, if they had full confidence, they would have just bought equity instead, but I think the sentiment still stands. It’s a very safe investment no matter where your inherent biases lie.

As Saul pointed out in one of his previous monthly reviews, I think this debt issuance points more and more to Peloton being a focused hardware company than the software component being a main driver. I could see the extra capital being used for an acquisition to accelerate their tread supply or begin their foray into strength category. The subscriptions will act as a floor as they try to expand into more aspects of the fitness space. I doubt the extra capital will be used to try to accelerate subscription/software services (this will organically grow with more hardware). However, it is hard to ignore accelerating revenue (Q120=13%, Q220=16%, Q320=25%).

-Redeemed

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