At-home quarantine workouts are currently at an all-time high as gyms and fitness centers continue to be closed, and companies such as Lululemon Athletica (LULU) have certainly taken advantage of that. The trendy athleisure and activewear brand has agreed to acquire the smart personal fitness system startup Mirror for $500 million. With Mirror functioning as an independent business within Lululemon, this transaction will not only bring Lululemon one step closer to bringing customized workout routines to their customers, but it will also act as a healthy revenue stream model while safer-at-home orders are still put in place.
In 2019, Lululemon became an investor of Mirror. Because there is 50% of overlap between Lululemon and Mirror’s respective target markets, Lululemon decided this was a great opportunity for product growth and increased membership; thus, they valued the startup at $300 million. Along with Lululemon, other investors including celebrities and venture capital businesses also brought in millions of dollars to support Mirror, amassing a total of $74.8 million.
LULU shares have increased as much as 8% after they announced this acquisition on June 29, marking their overall year-to-date increase in shares at 36%. Peloton (PTON), one of Mirror’s major competitors, slightly pales in comparison, as their shares dropped 2.1% on the same day of the announcement. However, Peloton just launched their new workout channel on Roku platforms on July 1, raising their shares up by 4%. Nevertheless, analysts predict beneficial synergistic effects to occur over the next two years as Mirror is said to bring in about $100 million by the end of 2021, meaning that they will break even or even become somewhat profitable.
The acquisition, which is set to close in the second quarter of the 2020 fiscal year, will be paid by Lululemon’s $800 million in cash, a $400 million revolving credit line, and a new $300 million revolving credit line. It is beneficial for Lululemon to have revolving credit lines because they can flexibly borrow up to the credit limits once they pay off their debt without having to go through another loan approval process. Overall, Lululemon’s first acquisition seems to be running smoothly so far, but it will be interesting to see them race against competitors like Peloton as gyms start to reopen.
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