Golf equipment company Callaway announced on Tuesday afternoon that it has acquired the 86% of golf entertainment venue Topgolf it didn’t already own, in an all-stock deal valuing Topgolf at $2 billion. Topgolf did just over $1 billion in revenue in 2019, while Callaway had $1.7 billion in sales. (As recently as January, Topgolf was in talks with big banks for a $4 billion IPO; then the pandemic happened.)
When reports of the merger first came out on Tuesday, before the company made it official, Callaway (ELY) stock initially popped more than 7%. But after Callaway announced the merger on Tuesday after market close, Callaway shares fell 18% by market close on Wednesday.
Clearly, shareholders do not like this deal.
Topgolf has been around since 2000 and started in England. It expanded to the U.S. in 2005 with a location in Alexandria, Va., that later closed, but its first hugely successful U.S. location was in Dallas, where the company is now headquartered.
Since then, it has opened more than 60 locations and acquired a number of golf businesses and products, including World Golf Tour, a golf gaming company, and ProTracer, a ball flight tracker that Topgolf rebranded Toptracer.
Callaway first invested in Topgolf in 2006, then upped its stake to 14% in 2018. Now it’s buying the whole thing because, according to Callaway CEO Chip Brewer on an analyst call on Wednesday, “These businesses just make sense together.”
Brewer says Callaway and Topgolf combine to create “a highly compelling position in golf... Golf Plus, if you will. Together, we have a combination of brands, channels, and a base of millions of consumers that will prove a powerful formula for our success.... This company will have reach that will extend across the entire worldwide game of golf, from elite touring professionals to new and aspiring entrants to the game.”
That last phrase about “aspiring entrants to the game” is key, and is debatable.
Topgolf locations had 23 million visitors in 2019. About half (51%) of those visitors identify as non-golfers. Brewer says that three-quarters of those people “express interest in playing on-course golf after visiting.”
If you’ve never been to Topgolf, here’s what you have to understand: it’s a party venue. The locations offer food, drinks, music, and other games and activities, all anchored around driving balls and tracking your drive distance electronically. Topgolf has become extremely popular with bachelor and bachelorette parties, specifically because you don’t have to drive golf balls there at all; there are tons of things to do. Many Topgolf locations also hosted concerts, in the pre-pandemic era.
Callaway is framing its business opportunity as converting Topgolf visitors into real golfers and thus, ideally, Callaway equipment buyers. But that’s far from a sure thing.
During the pandemic, rounds of golf played in the U.S. has soared, according to the National Golf Foundation. That makes sense: it’s an outdoor sport that allows for social distancing. More young people are playing golf in 2020, and often in a social setting, toting hard seltzers onto the course. But there’s no guarantee that trend has anything to do with Topgolf, or that one business will feed the other.
And now, during the pandemic, buying Topgolf looks riskier than it would have one year ago.
Casey Alexander, an analyst with Compass Point, told Callaway CEO Brewer on the analyst call on Wednesday, “I understand all the reasons for doing it, I don't understand the price.” And in response to Callaway’s assessment that each Topgolf location can reach an average $5 million in annual EBITDA, Alexander said, “It doesn't sound like a real number.”
Brewer says Topgolf has reopened all of its locations since temporarily shutting them during the pandemic, and installed dividers between bays to maintain social distancing. (Is that still as appealing for visitors?) Since reopening its locations, Topgolf, overall, is back to “between 80% to 85% of 2019 levels.”
That rebound is encouraging for Callaway. But is it encouraging enough to justify its stated expansion plan? Callaway plans to open 20 more Topgolf venues by the end of 2022. It also expects that by 2022, “all venues should be performing at an average unit level roughly consistent with the 2019 benchmark.”
What that really translates to is a bet on social life after the pandemic returning to the way it was before. It’s a bet that people will return to Topgolf locations in the same numbers as they did before COVID-19. Callaway is also betting it can convert many of those non-golfer party-goers into golfers.
Those are big bets.
Daniel Roberts is an editor-at-large at Yahoo Finance and closely covers sports business. Follow him on Twitter at @readDanwrite.