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Transaction Overview
On August 7, 2024, Topgolf Callaway Brands Corp. (NYSE: MODG, $11.73, market cap: $2.2 billion), a leading golf equipment and entertainment company, announced that it is conducting a formal strategic review of its business and that management is considering a potential spin-off of its Topgolf division (for more information, visit spinoffresearch.com). The review includes an evaluation of organic strategies to return Topgolf to profitable same-venue sales growth, as well as inorganic alternatives, including a potential spin-off of Topgolf. The review is being conducted with the assistance of external advisors and is focused on maximizing long-term shareholder value. The spin-off of the division would reverse the 2021 merger of Callaway Golf Company (“Callaway”) (NYSE: ELY) and Topgolf International, Inc. (“Topgolf”) to create Topgolf Callaway Brands. The decision was made following disappointing second quarter 2024 financial results and continued declines in the company’s stock price. The strategic review will include evaluating organic strategies to return Topgolf to profitable same-venue sales growth, as well as inorganic alternatives, including the potential spin-off of Topgolf. In March 2024, the company denied market rumors that it was considering selling its golf equipment division.
Topgolf Stock Performance Spinoff Details and Top 5 Shareholders
Spin-off Research
Following the separation, Topgolf Callaway Brands (RemainCo) will focus on its golf equipment and active lifestyle divisions. Chip Brewer will remain CEO of Topgolf Callaway and may assume a leadership role in the newly separated company. The company plans to complete the separation process as quickly as possible, pending due diligence, regulatory approvals and market conditions. Brewer did not provide a specific timeline for the Topgolf review, saying only that it would be completed “expeditedly.”
Basis of the transaction
In March 2021, Topgolf merged with Callaway Golf Company to form Topgolf Callaway Brands Corporation (ticker: MODG) in a deal valued at approximately $2 billion. The strategic merger combined Topgolf’s innovative entertainment venues with Callaway’s established golf equipment and apparel business. The merger marked a significant financial inflection point for both companies, resulting in synergies and long-term competitive advantages. Since acquiring Topgolf in 2021, the segment has grown rapidly and contributed significantly to overall revenue. The company has also implemented several strategic initiatives since the merger, including the acquisition of Big Shot, Topgolf’s largest incumbent competitor, and the development of new facilities. The company plans to build an additional 8 to 9 new facilities in 2024, down from its previous plan of 11 facilities per year.
However, the company faces challenges, including a softer-than-expected consumer environment and macroeconomic pressures, which led to an 8% decline in second-quarter 2024 same-store sales for its Topgolf business. In addition, Topgolf’s business model, which combines entertainment and food and beverage services, has lower margins compared to Callaway’s higher-margin golf equipment division. This disparity weighs on the company’s overall profitability. In addition, Topgolf Callaway’s high debt levels, including its debt-to-equity ratio (currently about 68%), are significant issues that should concern investors. The company’s interest-bearing debt is large relative to its market capitalization, and high interest expenses have nearly offset operating profits, with profits approaching breakeven. Despite healthy profits, cash flows are weak due to heavy capital expenditures, resulting in negative leveraged free cash flow. This poor cash flow profile, combined with high debt, limits the company’s ability to return capital to shareholders and may require it to raise equity financings or slow growth investments. Since the merger, the stock has fallen about 70% based on its current market price of $11.73 as of Aug. 13, after hitting a high of $37.29 on June 1, 2021. Meanwhile, its closest peer, Life Time Group Holdings (LTH), has returned about 25% since 2021.
Key Data
Spin-off Research
During the second quarter earnings conference call, the company’s president and CEO, Chip Brewer, said, “We believe Topgolf is a quality business with significant future opportunities. At the same time, we have been disappointed with the trajectory of our stock price and recent same-venue sales performance for some time. As a result, we are conducting a full strategic review of Topgolf.” Topgolf Callaway Brands Corporation’s decision to consider separating its Topgolf business stems from a desire to unlock greater value for shareholders and refocus on its core strengths in the golf equipment and active lifestyle segments. The company also noted during the earnings conference call that Topgolf is performing well in venue margins and new venue development, but same-venue sales have been weak due to cyclical and post-COVID normalization. The company remains confident in improving sales and sustaining strong consumer interest in the Topgolf experience. Topgolf’s business model is strong, supported by its ability to effectively identify and build new venues, and is expected to provide solid growth prospects. The separation is expected to allow each company to pursue its own growth strategies tailored to its respective markets. For Topgolf, this means focusing on venue expansion and enhanced digital engagement; meanwhile, Callaway can focus on innovating its core equipment and apparel business. Additionally, the separation will allow both companies to attract investment from sector-specific funds that are better aligned with their business models. The spin-off will also allow both companies to trade separately, allowing each company to maximize the value of their equity.
Q2 2024 Performance Review and Corporate Outlook
Q2 2024 results
Consolidated revenues for the second quarter of 2024 were $1.158 billion, down 2% year over year, 3% below the midpoint of guidance primarily due to softer trends in the Topgolf business. The year over year decline was impacted by an 8% decrease in golf equipment and a 3% decrease in active lifestyle, but is consistent with expectations. The company stated that these declines were primarily due to a planned change in the product release calendar. Asia sales decreased 15% primarily due to market softness in South Korea and foreign currency issues in Japan. This was partially offset by increased revenues from new Topgolf venues. Adjusted EBITDA for the second quarter of 2024 was $206 million, flat year over year, while adjusted EBITDA for the last 12 months increased more than 10% year over year. Non-GAAP net income was $83 million, up 10% year over year, driven by higher investment income and tax benefits.
Third Quarter and FY24 Outlook
Q3 2024
The company expects consolidated revenue in the range of $970 million to $990 million in 3Q24, down from $1,041 million in 3Q23. Adjusted EBITDA is expected to be between $95 million to $105 million, down from $163 million last year due to revenue deleveraging, higher marketing expenses and higher hedge losses. At Topgolf, revenue is expected to decline low single digits, with operating income falling more than revenue due to revenue deleveraging and changes in the timing of marketing expenses. Same-venue revenue is expected to be stable in both the third and fourth quarters.
24th fiscal year
The company 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 same-store sales expectations and a potential softening consumer environment. Approximately $170 million of the decrease was attributable to the Topgolf business and $55 million was attributable to the product division. As a result, the company’s adjusted EBITDA guidance was also lowered by $50 million, and is now expected to be in the range of $570 million to $590 million. For Topgolf, revenue guidance was revised to $1.79 billion and adjusted EBITDA to $310 million, reflecting the softness in the second half and the decline in same-store sales.
Company Profile
Topgolf Callaway Brands Inc.
Topgolf Callaway Brands Corp. (NYSE: MODG) is a tech-enabled modern golf and active lifestyle company that delivers world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells 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 comprehensive ecosystem that includes both on-course and off-course golf. The Company’s products 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 merged with Topgolf to expand its portfolio and strengthen its position in the golf entertainment industry. The Company changed its name to Topgolf Callaway Brands Corp. on September 6, 2022, and updated its ticker symbol on the New York Stock Exchange to “MODG.” The company’s products and services are available to consumers through multiple channels in more than 120 countries worldwide. The company operates through three segments: Topgolf, Golf Equipment and Active Lifestyle. Topgolf Callaway Brands reported total revenue of approximately $4.3 billion in fiscal year 2023.
Topgolf business (spin-off)
Topgolf is a leading technology-enabled golf entertainment business with an innovative product and services platform comprised of state-of-the-art outdoor golf and entertainment facilities, breakthrough proprietary Top Tracer ball-tracking technology and a digital media platform. The Topgolf Facility Segment, the largest line of the Topgolf business, consists of company-operated Topgolf facilities in the U.S. and company-operated and franchised facilities outside the U.S. The Topgolf division generated revenue of approximately $1.8 billion in fiscal year ’23 and is a significant contributor to the Company’s earnings.
Organizational Structure
Spin-off Research
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