Did Callaway Golf Sink A Birdie By Buying Topgolf At A 50% Discount To IPO Price?

Topgolf was an IPO candidate earlier this year, but will instead merge with golf equipment and apparel seller Callaway, a minority investor in the company.

What Happened: Callaway Golf Company ELY announced last week it's combining its business with Topgolf, a leader of golf entertainment venues.

“Together, Callaway and Topgolf create an unrivaled golf and entertainment business,” said Callaway CEO Chip Brewer.

Callaway is issuing 90 million shares in an all stock deal and will own 51.5% of shares after the deal closes in early 2021. Callaway previously owned 14% of Topgolf through several investments in the company beginning in 2006.

The deal values Topgolf at $2 billion, or $2.5 billion when including $555 million net debt.

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Why It’s Important: Topgolf was in talks this year for a potential IPO or SPAC deal to bring the company to the market. Dallas News reports the valuation of Topgolf was $4 billion earlier this year.

Thanks to its timing of the deal and Callaway’s 14% equity in the company, Callaway could be getting a steal here buying shares valuing Topgolf at $2 billion or half of what the company was valued at less than six months ago.

According to the release, Topgolf is in the early stages of a 10-year unit growth plan. Topgolf had $1.1 billion in revenue for 2019 and has grown annual revenue an average of 30% since 2017.

Revenue for the combined company would have been $2.8 billion in fiscal 2019 and is expected to grow to $3.2 billion in 2022.

Callaway Recovering: Callaway recently reported preliminary third-quarter results. Revenue is expected to be $476 million for the third quarter, up 12% year-over-year.

Brewer said the golf equipment business was recovering quickly and faster than originally expected during the second-quarter earnings release. Second-quarter revenue was down 34% year-over-year.

Price Action: Shares of Callaway Golf are down 23% in the last five sessions as investors trade the stock down on the merger.