$PTON Chicago PE Firm Is Betting BIG on Peloton

No subtle hints

This article was originally published on August 21, 2024 before Peloton’s Q4 earnings report on X via GeorgeC1953

The end of August, just before Labor Day, is typically slow for most legal practices. I no longer handle complex corporate cases in court; now, I focus on legislative policies related to income tax and accounting methods. It’s less dramatic, but it allows me to tackle complex policy issues, akin to playing brain puzzles everyday. I can't complain – now back to the topic.

*This is just my analysis based on publicly available disclosures. This is neither legal nor financial advice.*

Peloton will report Q4 earnings tomorrow pre-market. As I've alluded in my previous article, I've been digging through large institutional buys from last quarter, as disclosed in 13Fs. One notable buy was GTCR and I don't believe it's inconsequential.

It opened a new position with 14M shares last quarter, representing 3.775% of common stock outstanding, now Peloton's 6th largest holder, market value representing about $45M.

GTCR LLC: a big boy from Chi-town

GTCR LLC is a PE and VC firm specializing in mezzanine, middle market, PIPES financing, complex corporate carve-outs, growth capital, buyouts, investments through transformational acquisitions, organic growth and add-on acquisitions.

(On a side note, the team's directory page is uninspiring, took a page out of Suits, and sprinkled with Patrick Batemans.)

GTCR typically identifies and pursues platform acquisitions with management partners through funding a new company to make the initial acquisition and backs incumbent management of an existing company to acquire the business in high growth fragmented industries.

Within healthcare and life sciences, it invests in the product segment with a focus on branded devices and in software, services, data and information services, technology-based outsourcing and network-based services. Here, Peloton categorically fits their typical investment target, except that it’s a public holding.

It typically invests in U.S. companies, with transaction sizes ranging from $30 million to $500 million in companies with operating profits between $5 million and $150 million. Like any private equity firm, it generally seeks to take a majority stake and also provides debt capital for struggling companies. However, since JPMorgan and Goldman provided the revolving credit facility, I do not believe this firm would take on that role in this case.

So why invest in a company that merely makes "stationary bike with an iPad?"

Simple, in my opinion, it's undervalued. I believe David Einhorn's Greenlight capital, a value-oriented HF, opened a new position of 6.7M share last quarter for the same reason.

It’s an oversimplification to value a company with many moving parts, but I prefer to use the TEV/NTM Total Revenue ratio to gain "high-level" value insights into how much investors are willing to pay for each dollar of future revenue. In other words, a higher ratio suggests that the market has higher expectations for future growth or profitability, while a lower ratio could indicate that the company is undervalued or expected to have lower growth prospects.

As mentioned in the Q3 earnings call, management is not focusing on growth but on cost reduction. By this metric, the company is trading at a much lower 1.04x compared to its COVID-19 heyday of 8x. Bang-for-the-buck!

GTCR probably wants more shares

It’s rather cringeworthy that they trademarked "The Leaders Strategy™" to describe their modus operandi, with the following statement standing out:

Peloton currently has co-interim CEOs running the company following the resignations of Foley and McCarthy. The Board has been actively searching for a new permanent CEO over the past few months, and my hunch is that this is where GTCR wants to step in by 1) joining the Board as an active investor, and 2) appointing its preferred CEO.

Some have argued that GTCR merely seeks to boost the stock price to exit, but this contradicts their low-turnover approach to investments, including their stake in public companies like Peloton. This leads me to believe that GTCR is accumulating more shares as I write this.

Breaking down its commons position

It owns 14 million shares as of June 30, with a likely cost of $3.22 per share, representing 3.775% of the company’s shares outstanding (CSO). While GTCR has a history of fully buying out closely-held companies, that is unlikely to be the case here. If its purpose is to influence the board, a significant ownership stake is generally around 5% to 10% or more, which can provide leverage in discussions with the company. GTCR would need to acquire at least another 5-6 million shares to surpass the 5% threshold, which would require the firm to file a Schedule 13D, indicating control intent.

My speculation is that GTCR will continue to buy shares throughout this quarter and beyond to gain leverage with the board, especially as the company searches for a permanent CEO. The timing seems well-suited for both Peloton’s corporate restructuring and GTCR’s long-term strategy to influence control of the company. We will know more next quarter from its 13F disclosure.

Earnings, earnings, earnings

I will not speculate on the exact numbers and estimates before Peloton’s Q4 earnings report on August 22. It’s a bit of a fool’s game at the moment. However, I am looking for insights into subscription churn rate, revenue growth, and further cost reductions. In the meantime, I plan to build a LEAPS position in the coming weeks, following GTCR’s likely increasing stake in Peloton.

*I have '25 and '26 call LEAPS to test its liquidity and spread.