Callaway and Topgolf Entertainment Group announced that the companies have entered into a definitive merger agreement. Under the terms of the agreement, Callaway and Topgolf will combine in an all-stock transaction.
The number of shares to be issued is based upon an implied equity value of Topgolf of approximately $2 billion, including the 14 percent already owned by Callaway.
Topgolf is the tech-enabled golf entertainment business with a platform that comprises its open-air venues, Toptracer technology and innovative media platform with a differentiated position in eSports. Topgolf generated approximately $1.1 billion in revenue in 2019 and has grown at a 30 percent compound annual rate since 2017. Callaway is a premium golf equipment and active lifestyle company with a portfolio of global brands, including Callaway Golf, Odyssey, OGIO, TravisMathew and Jack Wolfskin.
The companies together will be able to accelerate growth, including through:
- Fully Funded High Growth Opportunities: Topgolf is a high-growth platform with attractive unit economics across its businesses that will benefit from Callaway’s strong financial position that can fully fund Topgolf’s growth plans at an attractive cost of capital.
- Complementary Fit: The two companies share a focus on golf and active-lifestyle consumers. With Topgolf’s 90 million consumer touchpoints a year, the combined company will benefit from a family of brands with reach across multiple channels including retail, venues, e-commerce, and digital. Topgolf is introducing new players to the game of golf, a trend that benefits Callaway’s golf equipment and soft goods businesses.
- Enhanced Resources For Accelerate Growth: The combined company’s sales, marketing and partnership infrastructure will drive traffic, increase the same venue sales and accelerate the conversion of new business. The merger of the two companies expands consumer reach, promotion, exposure, sales of equipment, and apparel to golfers and non-golfers.
- Long-term Potential: A shared culture creates long-term opportunities including the potential to distribute content across connected screens for instruction, fitness and lifestyle.
“Together, Callaway and Topgolf create an unrivaled golf and entertainment business,” said Chip Brewer, president and CEO, Callaway. “This combination unites proven leaders with a shared passion for delivering exceptional golf experiences for all – from elite touring professionals to new and aspiring entrants to the game. We’ve long seen the value in Topgolf and we are confident that together, we can create a larger, higher growth, technology-enabled global golf and entertainment leader. Callaway’s strong financial profile will enable the combined company to accelerate innovation, develop exciting new products and experiences, and create compelling value for shareholders while providing the dedicated teams of both companies more opportunities to showcase their talents and complementary capabilities.”
“We are excited to join the Callaway family and strengthen the experiences we create at the intersection of sports and tech-driven entertainment,” said Dolf Berle, CEO, Topgolf. “Fueled by a tremendous team of associates and a diverse offering across our venues, Toptracer, and media platform, Topgolf is truly changing the landscape of the industry by making golf more inclusive and accessible to people of all ages, demographics and skill levels. As part of Callaway, we plan to grow our leadership position by leveraging Callaway’s brand reputation, industry relationships and financial strength to connect more communities around the world to the Topgolf experience.”
Callaway first invested in Topgolf in 2006. The companies have maintained a strong partnership since including an exclusive golf partnership agreement at all Topgolf venues. Topgolf has seen rapid growth and strong customer engagement since its founding in 2000, driven by its three platforms: Venues, Toptracer and Media
In addition to Callaway, the current Topgolf ownership includes Providence Equity Partners, WestRiver Group and Dundon Capital Partners, which said, “This is a natural combination that brings together two complementary businesses at the center of one of the most dynamic sports and entertainment experiences available today. We are excited to support their continued growth as a united company.”
Financial Benefits and Transaction Structure
Callaway and Topgolf both delivered strong earning immediately before the COVID-19 pandemic and have since recovered ahead of expectations. Both companies have stated they are well-positioned to take advantage of both short- and long-term changes in consumer behavior as a result of the pandemic. This includes favorable trends in rounds played and growth in beginning and returning golfers as well as broader consumer preferences for outdoor activities. The combined company will have a diversified revenue mix including Golf equipment, 30 percent; Topgolf, 46 percent; and Softgoods, 24 percent.
The combined companies will also benefit from a strong financial profiles, including:
- Pro forma revenue of approximately $2.8 billion based on fiscal year 2019 results that is expected to grow to approximately $3.2 billion by 2022 and at approximately 10 percent per year in the years following;
- Pro forma adjusted EBITDAS of $270 million based on fiscal year 2019 results that is expected to grow to approximately $360 million by 2022 and at mid-to-high teens per year in the years following; and
- Funded leverage5 of approximately 3.6x in 2022, with opportunities to de-lever from there.
Topgolf is in the early stages of its growth with more than ten years of planned unit growth opportunity in its U.S. venues business and just 2 percent addressable market penetration in international venues and 1 percent in the Toptracer Range business.
Callaway’s continued strong cash generation and liquidity, including more than $630 million of cash and available credit facilities as of Q3 2020, position the company to fund Topgolf’s growth with the ability to pay down debt at the same time.
Under the terms of the merger agreement, Callaway will issue approximately 90 million shares of its common stock to the shareholders of Topgolf, excluding Callaway, which currently holds approximately 14 percent of Topgolf’s outstanding shares. Upon completion of the merger, Callaway shareholders will own approximately 51.5 percent and Topgolf shareholders (excluding Callaway) will own approximately 48.5 percent of the combined company on a fully diluted basis.
The number of shares issued is based upon an implied equity value of Topgolf of $1.986 billion6 (including Callaway’s ownership position). The number of shares issued is also based upon a fixed price of Callaway common stock of $19.40 per share. Callaway will assume Topgolf’s net debt, which is estimated to be $555 million at closing7, resulting in an estimated enterprise value for Topgolf of approximately $2.5 billion.
Governance and Leadership
Upon closing, the combined company’s Board of Directors will consist of 13 directors, including three directors appointed by Topgolf shareholders. Chip Brewer will continue to lead the combined company as president and chief executive officer. Dolf Berle will continue to lead the Topgolf business through a transition period following the close of the transaction at which time he intends to step down to pursue other leadership opportunities. John Lundgren will continue as chairman of the board of the combined company, while Erik Anderson will serve as vice chairman.
Topgolf will continue to operate from its headquarters in Dallas, TX.
Timing and Approvals
The transaction is subject to the approval of the shareholders of both Callaway and Topgolf as well as other customary closing conditions including required regulatory approval. The parties expect to complete the transaction in early 2021, subject to satisfaction of these conditions.
Callaway Preliminary Q3 Results and Business Update
Brewer added: “The world is rediscovering golf in a way that has led to a record quarter for our company. Both our golf equipment and soft goods businesses are recovering more quickly than we expected, and our third quarter projections reflect this momentum. Our recent investments into our e-commerce capabilities have proven particularly valuable, showing strong growth across all of our business segments this year including 108 percent growth in e-commerce for our soft goods segment in Q3.”
Based on currently available information, the Company estimates the following results for the quarter ended September 30, 2020:
- Net Sales: $476M million, up 12 percent
- Non-GAAP Earnings Per Share: 60 cents per share, up 67 percent
- Adjusted EBITDAS: $87 million, up 53 percent
Advisors
Goldman Sachs & Co. LLC served as the financial advisor to Callaway and Latham & Watkins LLP served as legal counsel. Morgan Stanley & Co. LLC and J.P. Morgan served as financial advisors and Weil, Gotshal & Manges LLP served as legal counsel to Topgolf.
Photo courtesy Topgolf