Callaway CEO talks Topgolf merger and growth outlook

By: Jayson Derrick
Jayson Derrick
Jayson lives in Montreal with his wife and daughter, loves watching hockey, and is on a lifelong quest to… read more.
on Oct 28, 2020
  • Callaway reached an agreement to acquire Topgolf.
  • The deal will see a premium golf equipment and apparel maker merge with an entertainment company.
  • Investors were not happy with the deal as shares of Callaway plunged 18%.

Callaway Golf Company (NYSE: ELY), a seller of premium golf equipment and related lifestyle apparel said on Tuesday it reached an agreement to acquire Topgolf, a privately-owned global sports, and entertainment community. On Wednesday, the CEO of Callaway Chip Brewer was on CNBC for some damage control after the stock plunged 18% throughout Wednesday’s trading session.

Merger details

Topgolf is a global sports and entertainment community that consists of open-air venues, its proprietary Toptracer technology, a media platform, and a position in eSports. The company generated around $1.1 billion of sales in 2019 and has been growing at a 30% compounded annual rate since 2017.

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Callaway and Topgolf will merge in an all-stock deal and values Topgolf at around $2 billion, including the 14% stake Callaway already owned.

Callaway’s rationale behind the transaction is four-fold, including: 1) acquiring a high-growth platform, 2) ability to market and sell directly to new golfers attracted to Topgolf’s modern and tech-focused platform, 3) ability to drive increased promotion, exposure, and sales to golfers and non-golfers, and 4) a focus on generating long-term growth opportunities beyond the actual sport.

The combined entity will have a highly diversified revenue mix that combined for $2.8 billion in 2019 sales and is expected to grow to $3.2 billion by 2022. Pro forma adjusted EBITDAS of the combined entity would have been $270 million in 2019 and this figure is modeled to rise to $360 million by 2022.

Callaway wasn’t the only stock that suffered a near-20% plunge on Wednesday after a major announcement. Retailer Bed Bath & Beyond (NASDAQ: BBBY) detailed a new multi-year outlook Wednesday morning that sent shares trading notably lower.

CEO addresses concerns

Callaway’s stock had a particularly “tough day” after the deal was announced, Brewer said on CNBC’s “Closing Bell.” The stock heavily sold off above and beyond the broader market although the timing of the announcement “clearly wasn’t our friend.”

Investors also had a lot to digest in a short period of time given the “transformative” nature of the merger, the CEO said. The combination of the two companies creates an entity that “doesn’t really replicate anything that currently exists.”

Callaway is convinced the deal offers long-term value creation for shareholders despite the clear signal from investors that says otherwise, the CEO acknowledged. But Callaway has been an investor in Topgolf since 2006 and Brewer personally served on its board since 2012.

“We come at this from an insider’s perspective and it is a proven model that has outstanding growth prospects,” he said.

Finally, the deal will “more than double our growth prospects” and allows the company to operate from an even better position of strength.

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