Deal Overview

On August 7, 2024, Topgolf Callaway Brands Corp. (NYSE: MODG, $11.73, Market Capitalization: $2.2 billion), a prominent player in golf equipment and entertainment, announced that it is conducting a formal strategic review of its businesses, wherein the management is exploring a potential spin-off the Topgolf segment (for more information, visit spinoffresearch.com). This review includes the assessment of organic strategies to return Topgolf to profitable same venue sales growth, as well as inorganic alternatives, including a potential spin of Topgolf. The review is being conducted with the help of outside advisors and is focused on maximizing long-term shareholder value. A spin-off of the segment will reverse the 2021 merger between Callaway Golf Company (“Callaway”) (NYSE: ELY) and Topgolf International, Inc. (“Topgolf”), which resulted in the formation of Topgolf Callaway Brands. This decision comes after the dismal 2Q24 results and the continued decline in the company’s stock price. The strategic review includes assessing organic strategies to return Topgolf to profitable same-venue sales growth and inorganic alternatives, including a potential spin of Topgolf”. In March 2024, the company refuted market rumors that it was exploring a sale of its golf equipment arm.

Topgolf Callaway Brands (RemainCo) will focus on its Golf Equipment and Active Lifestyle segments post-separation. Chip Brewer is expected to continue as CEO of Topgolf Callaway and may also hold a leadership role in the newly separated entity. The company plans to complete the separation process as swiftly as possible, pending due diligence, regulatory approvals, and market conditions. Brewer did not indicate a specific timeline for the Topgolf review, only saying it would be completed “expeditiously.”

Deal Rationale

In March 2021, Topgolf merged with Callaway Golf Company, forming Topgolf Callaway Brands Corp. (Ticker: MODG) in a deal valued at about $2 billion. This strategic merger combined Topgolf’s innovative entertainment venues with Callaway’s established golf equipment and apparel business. The merger was a significant financial inflection point for both companies, providing synergies and a long-term competitive advantage. Since the acquisition of Topgolf in 2021, the segment has grown rapidly, contributing significantly to overall revenues. Also, the company has been executing several strategic initiatives post-merger, including acquiring BigShots, the largest active competitor to Topgolf, and developing new venues. The company plans to build 8 to 9 additional new venues in 2024, down from the previous plan of 11 venues per year.

However, the company has faced challenges, including a softer than expected consumer environment and macroeconomic pressures that led to an 8% decline in same-venue sales in 2Q24 in the Topgolf business. Moreover, Topgolf’s business model, which combines entertainment with food and beverage services, operates on lower margins compared to Callaway’s high-margin golf equipment segment. This disparity has weighed on the company’s overall profitability. Furthermore, Topgolf Callaway’s high debt levels, with a debt-to-equity ratio (currently ~68%) that should concern investors, are a significant issue. The company’s interest-bearing debt is substantial compared to its market capitalization, and high interest expenses nearly offset its operating income, pushing earnings close to breakeven. Despite healthy earnings, cash flows are weak due to significant capital expenditures, leading to negative levered free cash flows. This poor cash flow profile, compounded by high debt, limits the company’s ability to return capital to shareholders, potentially necessitating equity financing or a slowdown in growth investments. Post-merger, after reaching a high of $37.29 on June 1, 2021, the stock has declined ~70% based on the current market price of $11.73 as of 8/13. On the other hand, Life Time Group Holdings (LTH), its closest peer, has returned ~25% since 2021.

In its 2Q results conference call, Chip Brewer, President and Chief Executive Officer of the company, said, “We remain convinced that Topgolf is a highquality business with significant future opportunity. At the same time, we have been disappointed in our stock performance for some time and the more recent same-venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf”. Topgolf Callaway Brands Corp.’s decision to explore the separation of its Topgolf business stems from the desire to unlock greater value for shareholders and refocus on its core strengths in the golf equipment and active lifestyle segments. The company also stated in its earnings call that Topgolf is performing well in venue margins and new venue development but has underperformed in same venue sales, attributed to economic cycles and post-COVID normalization. The company remains confident in improving sales and maintaining strong consumer interest in the Topgolf experience. Topgolf’s business model is strong, with increasing core profitability and a solid growth outlook, supported by its ability to effectively identify and build new venues. The separation is expected to allow each entity to pursue independent growth strategies tailored to their respective markets. For Topgolf, this means focusing on expanding its venue footprint and enhancing its digital engagement, while Callaway can concentrate on innovating within its core equipment and apparel businesses. Additionally, the separation would enable both companies to attract investment from sector-specific funds more aligned with their business models. The spin-off will also allow both companies to trade separately and will allow each company to unlock tits stock value.

2Q24 Results Review and Company Outlook

2Q24 Results

In 2Q24, consolidated revenues decreased by 2% YoY to $1.158 billion, falling 3% below the midpoint of guidance, mainly due to softer trends in the Topgolf business. The YoY decline was impacted by an 8% decrease in Golf Equipment and a 3% decline in Active Lifestyle, aligning with expectations. The company said those declines were largely due to planned changes in its product release calendar. Sales in Asia fell 15% due to market softness, primarily in Korea, and foreign currency challenges in Japan. This was partially offset by revenue growth at Topgolf from new venues. Adjusted EBITDA for 2Q24 was $206 million, flat compared to last year, with trailing 12-month adjusted EBITDA up over 10% YoY. Non-GAAP net income increased by 10% YoY to $83 million, driven by higher investment income and a tax benefit.

3Q and FY24 outlook

3Q24

For 3Q24, the company expects consolidated revenue to range between $970 million and $990 million, down from $1.041 billion in 3Q23. Adjusted EBITDA is projected to be between $95 million and $105 million, a decline from $163 million last year due to revenue deleverage, higher marketing expenses, and increased hedge losses. At Topgolf, revenue is expected to decrease by low single digits, with operating income falling more than revenue due to revenue deleverage and changes in marketing expense timing. Same-venue sales are anticipated to remain stable in both 3Q and 4Q.

FY24

The company has lowered its full-year 2024 revenue guidance by $225 million, or about 5%, to a range of $4.2 billion to $4.26 billion due to revised expectations for same-venue sales and a potentially softer consumer environment. Around $170 million of this decrease is from the Topgolf business and $55 million from the products segment. Consequently, the adjusted EBITDA outlook has also been reduced by $50 million, now expected to range between $570 million and $590 million. For Topgolf, revenue guidance has been revised to $1.79 billion and adjusted EBITDA to $310 million, reflecting a softer second half and a decline in same-venue sales.

Company Description

Topgolf Callaway Brands Corp.

Topgolf Callaway Brands Corp. (NYSE: MODG) is a tech-enabled Modern Golf and active lifestyle company providing world-class golf entertainment experiences, designing and manufacturing premium golf equipment, and selling golf and active lifestyle apparel and accessories. The company operates through a portfolio of global brands, including Topgolf, Callaway Golf, TravisMathew, Toptracer, Odyssey, OGIO, Jack Wolfskin, and World Golf Tour (“WGT”). “Modern Golf” is a dynamic and inclusive ecosystem that includes both on-course and off-course golf. The company’s offerings include high-quality golf clubs, golf balls, state-of-the-art golf and entertainment venues, proprietary Toptracer ball-tracking technology, and a range of premium active lifestyle products. In 2021, the company expanded its portfolio by merging with Topgolf, enhancing its position in the golf entertainment industry. On September 6, 2022, the company changed its corporate name to Topgolf Callaway Brands Corp. and updated its New York Stock Exchange ticker symbol to “MODG.” The company’s products and services are available to consumers across multiple channels in over 120 countries globally. The company operates through three operating segments: Topgolf, Golf equipment and Active Lifestyle. Topgolf Callaway Brands reported a total revenue of approximately $4.3 billion in FY23.

Topgolf Business (Spin-Off)

Topgolf is a leading technology-enabled golf entertainment business with an innovative platform of products and services comprised of state-of-the-art open-air golf and entertainment venues, a revolutionary proprietary Top tracer ball-tracking technology, and a digital media platform. The Topgolf venues business, the largest line of the Topgolf business, comprises Company-operated Topgolf venues located within the United States and Company-operated and franchised venues located outside the United States. The Topgolf segment is a significant contributor to the company’s revenue, with approximately $1.8 billion in FY23.