Topgolf Callaway has made official what many have been waiting for over the past month. The company is officially breaking up.
In an announcement to investors late yesterday, Topgolf Callaway announced that it will spin off the Topgolf business and create two separate and independent companies. Topgolf will go in one direction. Callaway golf equipment and active lifestyle brands will go next.
You can call it an amicable divorce.
You might as well call it a reset in January of 2021, before the Topgolf-Callaway merger.
The split is expected to be finalized in the second half of 2025.
There is a significant amount of information to unpack here, but it should be understood that neither company is on the verge of bankruptcy. What seems to be happening is the eventual realization that Topgolf and Callaway, as business models, are too different in terms of capital investment requirements and quarterly results to stay together.
In Divorce Court, they’ll call it “irreconcilable changes.”
Separation is difficult to do
“Over the past decade-plus, we have transformed Callaway into the number one brand in golf equipment while building a successful and complementary apparel and accessories business,” CEO Chip Brewer told investors yesterday. “Since our merger with Topgolf, we have made significant investments in the Topgolf business that have dramatically expanded its scale, digital capabilities and venue profitability.”
This is the window dressing. The bottom line, however, is that, after a three-year marriage, the two business models were simply a bad match.
“Topgolf has a different way of operating, capital structure and investment thesis than Callaway,” Brewer said. “As a result, the Board has determined that the separation of Topgolf will best position Topgolf and Callaway for success and maximize shareholder value.”
In plain English, this means that the growth and profitability expectations for Topgolf and Callaway are different and ultimately proved to be incompatible.
As Topgolf Callaway Chairman John Lundgren said yesterday, “The creation of two distinct companies, each with a distinct focus and proven business model, is intended to drive continued momentum in both businesses and deliver value to all our shareholders”.
What will the Topgolf Callaway split look like?
Topgolf Callaway expects the split to become final sometime in the second half of next yearalthough the company is not dismissing the idea of a “reconciliation”.
The terms of separation have advantages for both parties. First, Callaway will be freed from Topgolf’s financing needs since each new Topgolf location eats up a lot of capital. The announcement states, “The separation will position both companies to implement appropriate capital investments.” In other words, a standalone Callaway’s bottom line (and, we assume, stock prices) won’t be affected by Topgolf’s capital investments needed to build new locations. In turn, Topgolf will be able to invest in its own business without worrying about how it will affect the combined company’s bottom line (and, we assume, stock prices).
New, independent Topgolf is getting a generous settlement. The company will spin off at least 80.1 percent of Topgolf in a tax-free transaction, according to the report. Callaway will also retain all of Topgolf Callaway’s existing financial debt. Topgolf will retain the venue’s financing obligations, but otherwise leaves the wedding with no financial debt to speak of, along with a substantial cash balance.
Significantly, existing Topgolf Callaway shareholders will receive a pro rata distribution of shares in the new publicly traded Topgolf company.
This is important to note. Topgolf is not being “sold” or “dumped”. Rather, it is being spun off as an independent company with existing shareholders taking a stake. Callaway will retain partial ownership in Topgolf for at least some time.
Chip Brewer will stay on as CEO of Callaway. Artie Starrs, the current head of Topgolf, will be CEO of that company.
The new Callaway will include the Golf Equipment and Active Lifestyle units, along with Toptracer, which was part of Topgolf at the time of the merger.
How did it come to this?
Topgolf and Callaway merged in February 2021 and renamed themselves Topgolf Callaway. The $2 billion deal catapulted the fledgling company into the stratosphere, making it by far the biggest name in golf. Each of the company’s three business units (Topgolf, Golf Equipment and Active Lifestyle) is a multi-billion dollar entity in its own right.
PARTNERSHIP hit the rocks last November after the company’s third quarter financial report. Despite reporting more than $1 billion in quarterly sales and $30 million in quarterly profit, Topgolf posted its second straight lower-than-expected results. For the second quarter in a row, same-country sales fell, and not by a little. Topgolf Callaway had expected significant same-country sales growth for 2023, but instead, those countries were lagging behind.
That made investors grumpy, but lower sales guidance and EBITDA projections resonated with them. Share prices went into an immediate slump, falling 37 percent since the beginning of the year. A stock that sold for $25 in January could be had in November for less than half that.
Things didn’t improve during the first two quarters of 2024, Topgolf’s revenue was rising, but same-location sales continued to lag. The only thing that drove revenue growth was new countries.
You don’t have to be EF Hutton to know this isn’t sustainable.
of Topgolf Callaway “strategic review”
In August, Topgolf Callaway announced an ongoing “strategic review.” of the Topgolf business that included a potential Topgolf spin-off.
This announcement prompted another sharp drop in stock prices. On August 23, Raymond James analyst Joseph Altobello downgraded Topgolf Callaway stock, advising clients to avoid the stock until the potential spin-off is resolved. At that point, shares of Topgolf Callaway had fallen 22 percent for the year. It hit $10.04 a share last Thursday with nearly 5 million shares traded. Two million was the daily rate.
Altobello warned that Topgolf’s impending spin-off may be too late. That may have played a role in the timing of yesterday’s announcement. Shares of Topgolf Callaway closed yesterday at $10.76 per share. The announcement came after Wall Street closed, but the stock jumped more than 12 percent in after-hours trading.
Viewing the separation as a divorce, both parties appear to be working together for the sake of the children, who, in this case, are the investors. The company is touting the golf division’s position as the number one in golf club sales and a growing number two in golf ball sales, with nearly $1.4 billion in sales over the past four full quarters. Active Lifestyle’s sales over the past four quarters totaled $1.1 billion.
It is interesting to note that Toptracer is staying with Callaway. Toptracer is what self-proclaimed “real golfers” want Topgolf to be. It offers launch monitor capabilities and golf course simulation at your local driving range. The company has doubled the number of Toptracer-equipped driving ranges since 2021. Revenue is relatively small at $46 million, but Callaway sees a future with that technology.
No one is going to break, people…
Headlines are one thing, details are another. We are talking about two entities that are leaders in the market and are profitable. Topgolf Callaway’s quarterly financial results can be a roller coaster ride, but the year-end paint is usually black.
Topgolf, Active Lifestyle and Golf Equipment all turn a profit, and none of those entities are heading for the proverbial financial iceberg. You may think Topgolf is too expensive and not for the “real” golfer, but it has never lost money. It needs significant restructuring to strengthen same-country sales, but has been profitable since the day the merger was completed. The company will slow expansion over the next year. Only five or six new locations are planned now for 2025. But long-term, the company says it has room for up to 250 locations in the U.S. and another 250 abroad.
Whether this is a legitimate opportunity or an overly rosy scenario for investors remains to be seen. In its presentation yesterday, the company gave an upbeat outlook for Topgolf. He cited a 2.5-year construction cost payback for a new site, along with an 18 to 22 percent return on gross investment. The fact that the new company will go solo with no financial debt and plenty of cash on hand appears to be an attempt to make potential investors more comfortable.
Topgolf Callaway: What happens next?
Right now, nothing that matters to the everyday player or Topgolf fan. Everything available to you yesterday will be available to you today and for the foreseeable future. As mentioned, the “divorce” will not be final until the second half of next year. Meanwhile, both parties will prepare for the separation.
One thing to note, however, is a haunting story from last March. A South Korean newspaper reported that Topgolf Callaway’s three largest investors were joining forces to sell their ownership rights. According to The Chosun Dailey, the plan was to spin off Topgolf. The next step would be to sell Callaway’s golf and apparel business for $3 billion.
Those investors, Thomas Dundon along with BlackRock Advisors and Providence Equity Partners, together own 33 percent of Topgolf Callaway. A South Korean private equity firm was rumored to be a leading candidate to buy Callaway’s golf and apparel business.
At the time, Topgolf Callaway management denied the story. Yet here we are not quite six months later and the Topgolf spinoff is happening.
Chosun Daily also reported that Callaway would also be up for sale. It is possible that this story is not over yet.
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