Callaway Golf plunges following Topgolf merger

Shares of Callaway Golf plunged on Tuesday following an announcement that Callaway and Topgolf had agreed on an all-stock merger, with Topgolf having an implied equity value of approximately $2 billion. Yahoo FInance’s Dan Roberts joins The Final Round panel to discuss.

Video Transcript

MYLES UDLAND: This one, an interesting one in the world of golf, fan favorite here on "The Final Round." Callaway last night announcing news that had been reported earlier in the day, and I think anticipated by some following this space, that it would acquire the 86% stake in Topgolf that it did not already own that values Topgolf at about $2.5 billion.

Now, Callaway's market cap ahead of this deal was about $1.9 billion. So I guess you could say it's a merger of equals at best. If anything, Callaway a little bit smaller here. Now, the stock is off about 20% today. Dan Roberts, investors don't seem to love this news for Callaway. And I think on the call, there were some questions about the valuation.

But if we go back to January, Topgolf was worth $4 billion. It was going to IPO. And now Callaway gets to buy the whole thing at basically half off.

DAN ROBERTS: Yeah, it's very interesting. I would have identified Topgolf as maybe like a SPAC candidate, or, as you mentioned, it was going to do its own IPO. So this is Callaway just kind of buying the rest. What's really interesting to me about this is it's a bet on the post-pandemic future.

Topgolf is an in-person event. It's an events space. It's a-- you know, there's one in Vegas. There's one in Jersey. They're in Austin. They're opening up all over the place. And yet, it's a place that you go in a group to party. You know, yes, it's golf.

But typically, it's a big bachelor and bachelorette party destination. You drink, you have food, you have music. Everyone's yelling and playing and having fun. I'm sure that some somewhere have probably reopened with masks. And I'm sure also that there are some people who go alone and drive balls.

But the two times I've been to a Topgolf, I haven't seen that. It's a group activity. And so just kind of a funny mid-pandemic deal to look at because we're still in a time when you can't really do Topgolf. Or if you can, there's probably a little bit of a social stigma there right now because we're still very much amid the pandemic. And we're keeping group sizes small and distanced.

So, you know, Callaway is hoping or betting or projecting, telegraphing, that this time will end and people will return to Topgolf locations. All that said, the two times that I've been to one, I have to say I think it's a terrific business idea. I think it was clever.

Myles, you remember that there was a time when we were doing more the business of golf interviews and discussions, and a number in a row pro golfers that we talked to-- one was for a podcast, one we talked to in person at the Travelers Tournament, one was on the live show. My favorite question to ask them was always, ooh, people keep saying golf is in trouble. How can we lure young people back to golf, make golf sexy?

And all these pro golfers, they all said, well, Topgolf is a great start. That's a really great thing that's going to make young people excited about golf again. And I know that Melody just recently wrote about how, in some ways, it has happened. Young people are back into golf. So maybe it'll look like a smart deal, but right now, interesting amid the pandemic.

MELODY HAHM: Well, one thing I want to say is 50% of Topgolf's customers consider themselves non-golfers, right? So if you think about the intersection that we're talking about, I think the reason why investors are not bullish on this is, OK, we see this huge boom in golf right now in rounds being played, kind of exceeding expectations across the board.

I do see both in the data and number of rounds played in equipment sales, but also just my cohort, right, of, like, 20 something, 30 something females who had zero interest in the sport five months ago are suddenly taking lessons every week and pouring money to go to Hilton Head. So there does seem to be this change.

The question is, are they the type to then go to Topgolf? Or are they going to continue to say, on Saturdays, I'm going to spend five hours playing a round of golf and actually playing the game, and not spending 50 bucks buying Cheetos and nachos and happening to have golf on the side? So I do think there are different groups that we're talking about. I don't necessarily think we can lump them all together.

And to your point, Dan, Topgolf has been around for 20 years. This is not necessarily a novel idea. But I do feel as though prior to the pandemic, there were a lot more opportunities for this to be a place for people to congregate and aggregate, you know, have that fun experience. I do wonder, though, if that sort of desire will come back and if that pent-up demand will manifest in a Topgolf, rather than a bag of White Claws on a course.

DAN ROBERTS: Well, and just one last thought there. I'm really glad you mentioned that, Melody, because a leak that people might be making is the assumption that, you know, golf rounds played are up. Golf is back booming again.

And thus, buying Topgolf makes sense as a business move. Well, but really, Topgolf, you know, it's not golf. It's a party where one of the activities is you can drive balls and be with your friends. But, you know, it's not real golfers going there. It's party people.

MYLES UDLAND: Well, let's-- I mean, you say, Dan, the argument some people are making. This is the argument that Callaway is making and the argument that investors are not buying, right? The stock is down 20% today because investors, I think, are basically siding with the conversation we've had a lot of times and certainly the side I would come down on, which is that the chasm between Topgolf and actual golf is probably insurmountable for the vast majority of users.

But again, both businesses bringing in about a billion dollars a year in revenue. The company thinks they have a runway towards I think it's $300 million in EBITDA in a couple of years. They're very excited about the deal. But again, I think investors have quite a few questions, and we see, again, Callaway shares here off about 19% today.