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After their earnings call, Peloton noted that it was doing a new capital raise. They initially said they were going to raise $600 million in convertible senior notes but later raised it to closer to $1 billion. Peloton will net $854 million after commissions and fees.
Why is Peloton raising this money? From a high-level perspective, it’s because it’s nearly free to borrow money at the moment. The Motley Fool speculates further:
Peloton’s cash flow is already solid, with the company generating $198 million in operating cash flow. After deducting $70 million in capital expenditures, that brings free cash flow to $128 million last quarter. The company finished the quarter with $2.1 billion in cash on the balance sheet and also has a $250 million revolver that is undrawn.
Peloton is flush with cash
Peloton’s balance sheet is strong, and they are certainly flush with cash at the moment, but they’ve also committed $100 million to expedite shipping of its products overseas using air freight and faster ocean freight.
In addition to the freight costs, remember that Peloton announced in December that it would acquire Precor for $420 million in cash. That acquisition will be a game-changer, giving the consumer discretionary company a large manufacturing footprint in the US while also allowing Peloton to expand into the massive commercial market for workout equipment. The transaction is expected to close soon, and it will then take some time for Precor to ramp manufacturing of Peloton products.
Solving Peloton’s supply chain problem
Supply chain issues are Peloton’s largest problem at the moment, and it’s simply one they can throw money at to solve in the long term. By purchasing Precor, they can shift some of their manufacturing to the US for its US customers. By expediting shipping from overseas, they limit the damage they are seeing from a PR perspective with extremely long wait times. I personally ordered a Bike+ a few weeks ago, and I am looking at a mid-April delivery. If I didn’t already own a regular Bike, I might be tempted to look elsewhere for a connected fitness product. Competitors like Echelon and iFit.
Peloton could also be using the rest of the capital raise to finance future acquisitions, but we’ve heard nothing but rumors at this time.