A version of this article appeared in the July 1 issue of Bicycle Retailer & Industry News.
ATLANTA (BRAIN) — Wahoo Fitness says its financial woes are in the past after a recapitalization eliminated debt that had crippled it after the pandemic boom in indoor exercise products. Three private equity groups helped founder Chip Hawkins pay off a public debt owed to a bank consortium; it also put capital on Wahoo's balance sheet to enable growth.
The private equity funds that bought out the debt are Rhône Group, which also invested in Wahoo in 2021; Jory Capital, which has investments adjacent to cycling in the health and performance markets, including Human Powered Health, the title sponsor of a UCI pro cycling team; and RZC Investments, whose principals are Steuart and Tom Walton, grandsons of Walmart founder Sam Walton. RZC owns the Rapha apparel brand and Allied Cycle Works, the Arkansas carbon fiber bike manufacturer.
Hawkins also re-invested himself and said the three partners understand Wahoo's business and have "a long-term growth mentality."
Hawkins gave up majority control in 2021 when Rhône invested the first time. That deal enabled 2018 investor Norwest Equity Partners to partially cash out at the height of the pandemic sales boom. But it also set up Wahoo with debt that was difficult to pay off as sales inevitably declined following the boom.
Hawkins explained that the 2018 NEP investment "set a timer" for that group to exit Wahoo. Three years is a typical term for many private equity investments, and that was well-timed for NEP at nearly the peak of the pandemic sales boom.
"You can imagine that between 2018 when (NEP) invested and the end of 2021, when Rhône invested, the business did quite well," Hawkins said.
"We've always been really healthy financially, self-funding and self-sustaining. But in those particular years, COVID caused an exuberance in the market and we did incredibly well. NEP and everyone had an interest in getting some money out of the business then and that led to the Rhône deal."
Unfortunately, the deal saddled Wahoo with debt.
"The thing I wish I could take back is the leverage (that deal created). I have an MBA and a finance background but I didn't fully understand the dangers of the leverage. At the time it didn't seem like too much and it enabled the deal. The intent at the time was, 'we're growing, we're going to take the company public eventually ...'"
The debt was owed to a consortium of 15 banks and was publicly traded and rated by Standard & Poor's.
"That turned it into a news cycle every time they changed the debt (rating), which sucks for a private company," Hawkins said. Even some consumer cycling titles reported S&P's debt ratings for Wahoo, creating a narrative that the brand was circling the drain.
"It put us in a really bad situation where we had a year or so of too much debt for the size of the business," Hawkins said. " ... Ultimately, as we were running low on cash, because of the debt no one wanted to put more cash in because they think banks are going to take over the business.
"So in the first quarter this year, the banks took over the business and that wiped out everyone's equity in the business. And because it was this consortium of 15 banks, it was very hard to get anything done. They had the right attitude but it takes all 15 agreeing to do anything."
Many companies selling indoor exercise equipment had painful transitions after the pandemic sales slowed. Peloton's losses ballooned, forcing thousands of layoffs, and Saris Cycling's owners were forced to sell following a state re-organization process, for example. Zwift, which has become something of an arch-rival of Wahoo's, has had to make several rounds of layoffs.
Hawkins said Wahoo would have survived a downscaling without much drama if not for the debt.
"Outside of the debt and capital structure from that (2021) transaction, we would have been absolutely fine through this," he said.
He said the recapitalization left "a healthy amount of capital on the balance sheet."
"After experiencing that debt I had some pretty strong terms because I didn't want to have debt going forward," he said.
The recapitalization also re-set the company's value to a "rational" number, Hawkins said.
Hawkins is a believer in employee equity and most employees owned a share of the company prior to the private equity investments. When the banks took over in early 2023, shareholders lost all their equity but Hawkins said they had been able to cash out of some equity after the Rhône investment in 2021. "The Rhône deal led to a liquidity event so everyone was able to take equity out. So it wasn't like all their savings were wiped out," he said.
Hawkins said Rhône, Jory and RZC are invested in Wahoo for the long term. BRAIN asked what it was like working with the Waltons, whose interest in cycling has been much publicized.
"I'd met them several years ago and kept an open dialogue," he said. "They are private and friendly and open to good work with a long-term outlook. The relationship isn't that well established but I get every indication it will be a good one. They are not a traditional PE firm; they do not want to sell us in three years. And they've made a great commitment to cycling."
Matt Tarver, an RZC representative, told BRAIN the Wahoo investment complements other cycling brands in RZC's portfolio.
"We believe in the long-term market trends for both health and wellness and connected fitness. We're excited to partner with Chip Hawkins, Wahoo's management team and the balance of the investor group. Wahoo's proven track record as innovative market leaders complements our other cycling-related investments including Rapha and Allied Cycle Works amongst others," Tarver said.
Room to grow
While some industry pundits, including the author of this piece, have theorized that nearly every customer who ever wanted a smart trainer already owns one, Hawkins said there is still ample growth potential in the market.
"We're very bullish in general on indoor cycling. It's a very young category: Smart indoor trainers have been around for about 10 years, so it's really still in its infancy. The penetration is still very low.
"I have to admit everyone I know has an indoor trainer so I am probably biased. But we've triangulated five ways from Sunday and everything says the penetration is still 10-15% of cyclists own a smart trainer, which says there's a lot of room. Intuitively, everyone I know has one, but all our research says there's still a lot of guys out there that still don't."
Price pressure in the market is another concept that pundits like to toss about. Wahoo described that pressure in court filings earlier this year in its suit against Zwift for patent infringement.
Wahoo says Zwift's $500 Hub smart trainer infringes on its patent; the hub undercuts Wahoo's similar low-cost trainers by at least $200 at normal prices.
In filings arguing for a preliminary injunction barring Hub sales immediately, Wahoo argued that the Hub's continued existence on the market would permanently harm Wahoo by eroding the market for Wahoo's more expensive trainers. The company also argued that the Hub jeopardized Wahoo's ability to sell through independent dealers because Wahoo could be forced to lower retail prices, leaving inadequate margin for dealers (Zwift sells direct and is likely willing to sacrifice some margin on hardware to grow software subscription revenue). The court denied Wahoo's request for the injunction.
Following the recapitalization, Hawkins told BRAIN he expects demand for smart trainers to continue at all price points.
"We still see demand for both (high and low-priced trainers). Even through last year when we saw a lot of price discounting in the market, we continued to sell a lot of our ($4,000) KICKR Smart Bikes and the new ($1,300) KICKR trainers sold really well. There's always a demand for the most premium products on the market.
"That being said, there are lower-priced products out there than five years ago. That's not a bad thing, it just makes the category potentially more approachable. It's easier to get started riding," he said.
It's worth noting that while Wahoo is currently best known for its smart trainers and related accessories, the company started out making much more modest fitness electronics and has diversified with training software, the acquisition of pedal brand Speedplay and other categories such as GPS head units.
During the market downsizing, Wahoo was able to keep its product development pipeline flowing, CEO Mike Saturnia told BRAIN.
"It didn't stop," he said. "We had to go through a reduction in scale because the business size reduced, but we continued to invest in innovation and new products ... the product development pipeless was not interrupted. We also continued to invest in building the brand and to invest heavily in things like customer support to make sure that re-sellers and bike dealers had all the support they needed."
In a release following the recapitalization, Saturnia said, "This could not have happened without months of hard work and support from our channel partners. We want to thank our supply chain and retail and distribution partners for their trust and confidence as we navigated to a successful conclusion to this process."
