Callaway’s Topgolf acquisition has been a masterclass in value destruction

The combined company, Topgolf Callaway Brands, is now worth less than what Callaway paid to acquire Topgolf.

9/12/24 1:44PM

In October 2020, as the world dealt with pandemic lockdowns, Callaway Golf announced an intriguing acquisition: the golf brand was buying Topgolf, the fast-growing driving range/entertainment venue hybrid, in a $2 billion (including its existing 14% stake in the company) deal to create one of the biggest brands in golf.

At the time, the deal seemed like a home run for Callaway that would help it expand its customer base. Over 50% of Topgolf’s 23 million guests in 2019 were non-golfers, and 40% of off-course golfers (meaning they played at venues such as Topgolf) were between the ages of 18-34. Topgolf was also growing quickly: It had generated $1.1 billion in revenue in 2019, and its revenue had grown at a 30% CAGR over the last three years. The combined entity was expected to generate $3.2 billion in 2022 revenue and grow at a 10% CAGR after, as well as $360 million in 2022 adjusted EBITDA with mid-to-high teens growth after.

However, four years after announcing the business combination, management is preparing to pull the plug. Last week, The Wall Street Journal reported that the board of Topgolf Callaway Brands (the combined entity) would split the enterprise into two businesses, with a spinoff to shareholders being the most likely outcome.

Interestingly enough, the company surpassed its initial revenue projections, hitting $3.13 billion in sales in 2021 and $4 billion in 2022 (28% growth), but growth slowed in 2023, with revenue reaching $4.28 billion (7% growth), and the Wall Street Journal noted that Topgolf’s revenue is likely only up 1% year over year in 2024.

The combined company’s net income also decreased each year, from 2021 to 2023, from $322 million to $158 million to $95 million. One strain on the company’s bottom line was debt: Callaway assumed $555 million in Topgolf’s net debt, and interest expense has climbed by 82% from 2021 to 2023, from $115.6 million to $210 million.

I’m curious how the company’s management will value Topgolf in a spinoff, considering that the combined company is now worth less than the $2 billion Callaway paid for Topgolf four years ago, with its total market capitalization sitting at $1.69 billion.

Talk about value destruction.

David Crowther, Claire Yubin Oh

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