Callaway reached an agreement to acquire Topgolf.
Under the terms of the deal, a manufacturer of premium golf equipment and apparel will merge with an entertainment company.
Investors were not happy with the deal, as Callaway’s stock fell 18%.
Callaway Golf Company (NYSE: ELY), a seller of premium golf equipment and related lifestyle apparel, said Tuesday that it had reached an agreement to acquire Topgolf, a privately held global sports and entertainment company. On Wednesday, the CEO of Callaway Chip Brewer was on CNBC for some damage control after the stock fell 18% throughout Wednesday’s trading.
Details of the merger
Topgolf is a global sports and entertainment community consisting of open-air venues, the company’s proprietary Toptracer technology, a media platform and a position in eSports. The company generated revenues of approximately $1.1 billion in 2019 and has been growing at an annual rate of 30% since 2017.
Callaway and Topgolf will merge in a stock-only transaction and estimate Topgolf at approximately $2 billion, including the 14% stake Callaway already owns.
Callaway’s rationale for the transaction includes fourfold: 1) the acquisition of a high-growth platform, 2) the ability to market and sell directly to new golfers attracted by Topgolf’s modern and technology-oriented platform, 3) the ability to increase advertising, awareness and sales to golfers and non-golfers, and 4) the focus on creating long-term growth opportunities beyond the sport itself.
The combined entity will have a highly diversified revenue mix, with combined revenues of $2.8 billion in 2019 and expected to grow to $3.2 billion by 2022. The combined entity’s adjusted pro forma EBITDAS would have been $270 million in 2019, and this figure is expected to increase to $360 million by 2022.
Callaway was not the only stock to suffer an almost 20 percent drop in value on Wednesday following a major announcement. The retailer Bed Bath & Beyond (NASDAQ: BBBY) on Wednesday morning presented a new multi-year outlook that caused stock trading to drop significantly.
CEO addresses concerns
Callaway stock had a particularly “hard day” after the deal was announced, Brewer told CNBC’s Closing Bell. He said the stock had been heavily sold out beyond the broader market, although the timing of the announcement was “clearly not our friend.
Given the “transformative” nature of the merger, investors also had a lot to digest in a short period of time, the CEO said. The combination of the two companies creates a unit that “does not really replicate anything that currently exists.
Callaway is convinced that the deal will create long-term value for shareholders, despite the clear signal from investors who say otherwise, the CEO admitted. But Callaway has been an investor in Topgolf since 2006, and Brewer has personally represented Brewer on Topgolf’s supervisory board since 2012.
“We come from an insider perspective and it is a proven model that has excellent growth prospects,” he said.
Ultimately, the transaction will “more than double our growth prospects” and allow the company to operate from an even stronger position of strength.
