Moody’s affirmed Callaway’s B1 CFR following the announcement of its plan to acquire acquisition but changed its outlook to negative.
On October 27, Callaway announced plans to acquire the remaining 86 percent of the outstanding equity of Topgolf International, Inc. that it does not already own in an all-stock transaction valued at $1.7 billion. Callaway plans to issue 90 million of its common shares in exchange for all outstanding shares of Topgolf, making Topgolf a 100 percent wholly-owned subsidiary. The transaction is subject to both Callaway and Topgolf shareholder approval as well as regulatory approvals and other customary closing conditions. Callaway also plans to invest approximately $325 million over the next few years to expand Topgolf locations both in the US and abroad.
Moody’s said in its press release, “The negative outlook reflects Callaway’s diminishing ability to deleverage to below 5.0x debt/EBITDA within the next 12 to 18 months as the company plans to invest in the expansion of Topgolf venues rather than reduce debt. Based on the company’s initial investment plans, Moody’s expects Callaway’s debt to EBITDA to remain elevated at around 5.5x by the end of 2021 and only decline to below 5.0x by 2022. Additionally, there is increased operational risk as Callaway seeks to enter into yet another business related to the capital intensive, volatile, and high-risk casual dining and entertainment industry during a global pandemic. This follows a previous divergence to its core business model of golf equipment when it acquired several apparel brands over the past few years which have not been performing as originally planned.
“Although Topgolf is golf-related, its business focuses mostly on the casual consumer seeking entertainment and it is unclear how many of such consumers would convert to benefit Callaway’s core business. Topgolf has been materially and negatively impacted in 2020 due to the coronavirus and Callaway expects this business not to be cash flow accretive until 2024. The development of new venues elevates business risk as the 61 existing Topgolf locations have thus far resulted in modest same-store-sales growth pre-covid. The timing of the resolution of the coronavirus outbreak and Callaway’s success in executing its plan will continue to inflict high risk in this business investment. Additionally, the weak environment may limit the amount of outside funding that Topgolf can receive from landlords, potentially requiring an additional upfront investment by Callaway to expand by about 10 new locations per year.
“Although Callaway will not be providing a guarantee for the debt at Topgolf, Moody’s believes there will be implied support from Callaway over the near term given the significant investment Callaway will be making in terms of equity purchase and additional future cash investment for expansion.
“However, the affirmation of Callaway’s existing ratings reflects Moody’s view that Callaway will have the ability to curtail new investment if operating conditions at Topgolf turn negative. Moody’s CFR factors in the assumption that the company will curtail expansion if business conditions deteriorate at Topgolf.
“Moody’s also believes the combination of these two companies will help to broaden the Callaway brand and further promote the sport of golf to the casual customer. Callaway will have direct access to potential first-time golfers and the ability to sell or promote at Topgolf venues its equipment and apparel. Callaway will also be able to provide Topgolf with the ability for international venue expansion and promote its Toptracer Range expansion through Callaway’s existing partnerships.”
S&P placed all its debt ratings on Callaway, including the ‘B+’ issuer credit rating, on CreditWatch with negative implications.
S&P said in a statement, “The CreditWatch placement reflects our expectation that the incremental leverage over the next few years at Callaway as a result of assuming Topgolf’s debt may offset possible strategic benefits from combining the two companies, and we could lower the rating by one or more notches as a result. We will resolve the CreditWatch once we have assessed the impact of the merger on our view of the combined company’s business and financial risk.”
Photo courtesy Callaway Golf
