The merger of Topgolf and Callaway Golf, once heralded as a transformative step in blending entertainment and golf equipment, has come to an end. As the two companies chart separate paths, the implications for the golf and entertainment industries are profound. Here’s a deep dive into the split and what it means for stakeholders.
The Genesis of the Topgolf-Callaway Merger
In 2021, Callaway Golf completed its acquisition of Topgolf, a global leader in entertainment-driven golf experiences, through an all-stock transaction. The deal, valued at an implied equity of approximately $2 billion, included the 14% stake Callaway already owned. This strategic merger was designed to create synergies between Topgolf’s innovative entertainment venues and Callaway’s market-leading golf equipment, reshaping the golf experience for players of all skill levels.
Following the merger, Callaway Golf announced plans to rebrand as Topgolf Callaway Brands Corp. (“Topgolf Callaway Brands”) to reflect its expansive portfolio spanning the modern golf and active lifestyle ecosystem. As part of this transformation, the company updated its NYSE ticker symbol from ELY to MODG, signaling a new era as a global leader in golf and entertainment.
The Synergy
The merger between Callaway and Topgolf seemed like a perfect match on paper. Callaway was a well-established leader in the golf industry, while Topgolf was a rising star in golf-focused entertainment venues. The synergy between the two companies appeared highly promising, with a compelling business case at the time:
Topgolf’s Leading Position
Topgolf had established itself as a leader in tech-enabled golf entertainment, offering a groundbreaking platform that combined open-air venues, revolutionary Toptracer technology, and an innovative media platform. In 2019, Topgolf generated approximately $1.1 billion in revenue, achieving a 30% compound annual growth rate since 2017.
Callaway’s Market Leadership
Callaway was already a dominant force in the global golf equipment market, with a strong presence in active-lifestyle soft goods. Its growth had outpaced the broader golf market for seven consecutive years, showcasing its ability to deliver consistent returns.
A Promising Union
The merger positioned the combined company to accelerate growth in several key areas:
- Fully Funded Growth Opportunities: Topgolf’s high-growth platform, featuring attractive unit economics across its businesses, would benefit from Callaway’s financial strength and ability to fund growth plans at a favorable cost of capital.
- Highly Complementary Fit: Both companies shared a focus on golf and active-lifestyle consumers. Topgolf’s 90 million annual consumer touchpoints, paired with Callaway’s portfolio, provided a unique opportunity to connect with customers through retail, venues, e-commerce, and digital communities. Topgolf also introduced new players to the game, creating cross-promotional benefits for Callaway’s equipment and soft goods.
- Enhanced Resources for Growth: The combined company’s robust sales, marketing, and partnership infrastructure was expected to drive traffic, boost same-venue sales, and unlock new business opportunities. The expanded reach would promote and increase sales of golf equipment and apparel to both golfers and non-golfers.
- Innovation for Long-Term Potential: A shared culture of innovation offered long-term opportunities, including content distribution across connected screens for golf instruction, fitness, and lifestyle, creating a broader consumer ecosystem.
By aligning their strengths, Callaway and Topgolf aimed to redefine the golf industry, merging tradition with innovation to cater to a new generation of golf enthusiasts.
The Post-Merger Journey of Callaway and Topgolf (2021-2025)
After the merger, Topgolf experienced rapid growth, revolutionizing the driving range business by combining gameplay with sports bar-style entertainment and hospitality. With over 100 venues across the U.S. and internationally, its expansion was impressive. However, this growth did not translate into stock price success for Topgolf Callaway Brands.
Following the merger, Topgolf Callaway Brands’ stock experienced an initial surge, with MODG reaching an all-time high in mid-2021, climbing from around $28 to approximately $37 in a short span.
However, by 2024, the share price had plummeted to the $7–$8 range. This sharp decline was a significant disappointment, especially when compared to its main competitor, Acushnet (NYSE: GOLF), whose stock price rose from about $40 in 2021 to roughly $70 by 2024.
While there are several factors behind this underperformance—details of which we will explore shortly—Chip Brewer, president of Topgolf Callaway Brands, maintained that the overall business remained strong. He noted that Topgolf, as a standalone entity, performed well, but the company as a whole failed to ignite investor enthusiasm.
While the initial strategy seemed promising, internal and external pressures began to emerge, straining the partnership.
Separation into Two Independent Entities
On September 4, 2024, the company announced that its Board of Directors plans to separate its business into two independent entities: Callaway, a leader in golf equipment with a complementary Active Lifestyle business, generating approximately $2.5 billion in revenue through Q2 2024 (including Toptracer); and Topgolf, a high-growth, category-leading venue-based golf entertainment business, with approximately $1.8 billion in revenue through Q2 2024 (excluding Toptracer).
The company intends to execute the separation through a spin-off of the Topgolf business to Topgolf Callaway Brands’ shareholders. This transaction is expected to be tax-free for both the company and its shareholders under U.S. federal income tax laws. While a spin-off of Topgolf into a stand-alone public company is considered the most likely path, the company will continue to evaluate other separation options to maximize shareholder value.
One key aspect of the separation is that Topgolf will be left with no debt and $200 million in cash, while Callaway will retain a 19.9% stake in Topgolf, positioning it for future upside.
In summary, the split offers Topgolf a favorable outcome. The company will receive a spin-off of at least 80.1% of its shares, making the transaction tax-free. Callaway will retain all existing Topgolf Callaway financial debt, while Topgolf will assume its venue financing obligations but will otherwise emerge from the split debt-free, along with a significant ($200 million) cash balance.
Importantly, existing Topgolf Callaway shareholders will receive a pro-rata allocation of shares in the newly independent, publicly traded Topgolf company.
The Strategic Drivers Behind the Callaway-Topgolf Split
There are several reasons why the merger didn’t deliver the expected results for investors. In my view, the primary issue is the fundamentally different business models of Topgolf and Callaway, which make it challenging for investors to assess them as a single entity.
Let’s take a closer look at the reasons behind the stock’s underperformance.
Business Models
There is a fundamental difference between Callaway’s and Topgolf’s business models.
Callaway
Callaway, a global sports equipment manufacturing company founded in the 1980s, designs, produces, markets, and sells golf equipment, particularly clubs and balls, along with accessories like bags, gloves, and caps. It is a well-established and highly respected brand, often compared to Acushnet, the parent company of Titleist. Notably, Acushnet’s stock has performed well in recent years.
The golf equipment sector experienced robust growth post-COVID. Although the momentum has slowed somewhat in recent times, this growth has positively impacted Acushnet’s stock performance, while Callaway shares have faced a significant decline.
Topgolf
On the other hand, there is Topgolf—a company founded in the early 2000s that blends sports and entertainment (sportainment) while offering cutting-edge technology like Toptracer, one of the best in the industry (alongside Trackman).
Topgolf operates under a distinct business model that is highly capital-intensive with substantial fixed costs. Much of these costs stem from long-term leases, making consistent high traffic crucial for sustaining healthy earnings over time. Unlike its U.S. venues, which Topgolf fully owns and operates, its international locations are primarily franchise-based. For those seeking involvement in U.S. operations, the only option is becoming a landlord to Topgolf.
Jefferies sell-side analyst David Katz likens Callaway to Acushnet Holdings, the owner of Titleist and FootJoy, and compares Topgolf to Dave & Buster’s, a sports bar and arcade hybrid.
However, in my view, this comparison falls short. While Dave & Buster’s relies on arcades, Topgolf integrates sports, making it more akin to venues like Bowlero or Pinstripes. Still, considering its venue size and golf-centric approach, Topgolf is an industry pioneer, with TOCA Social and Home Run Dugout being more appropriate comparisons.
Topgolf venues are categorized as either small or large. Small venues typically cost $20–27 million to build and generate $13–18 million in annual revenue. Large venues, on the other hand, require $30–40 million in investment, with revenues ranging from $20–28 million annually.
The payback period for these venues is estimated at an impressive 2.5 years, as noted by Topgolf Callaway Corp. This metric highlights Topgolf’s potential as a strong investment—assuming favorable alignment of operational factors.
Customer Base and Market Targeting
Callaway caters to traditional golfers, including professionals and dedicated amateurs, who seek high-quality golf equipment and apparel. In contrast, Topgolf targets a broader, more diverse audience, attracting casual players, families, and social groups, many of whom may have little to no prior golf experience.
According to the National Golf Foundation, overall golf participation in 2023 shows a mixed trend: while on-course-only participation decreased by 8%, off-course participation surged by 19%, and those playing both on and off-course increased by 17%. It’s safe to attribute much of the off-course participation growth to Topgolf.
Growth Drivers
Callaway focuses on innovation in golf equipment and expanding its lifestyle brands, with growth driven by consumer demand for premium products and active lifestyle trends.
Topgolf, on the other hand, relies on geographic expansion, the appeal of its entertainment offerings, and the opening of new venues. Its growth is closely tied to real estate availability and market saturation.
In this sense, Topgolf can be viewed as a rapidly growing startup, where market saturation has yet to be fully tested, making it challenging to accurately assess the company’s value.
Is the Split Beneficial for Investors?
As a typical consultant answer goes, “it depends.”
Both brands are poised to become billion-dollar corporations and are solid, stable entities. In this regard, the split could allow for the maximization of value for both companies. Additionally, the valuation of Topgolf Callaway (NYSE: MODG) is approximately 55-60% of its book value (At the time this article was written) on a forward basis, which seems relatively low. Stocks in this space typically trade at a median multiple of 2.55x book value. Therefore, the separation could potentially unlock the full value for both companies.
Let’s estimate the post-split valuations for both companies.
Callaway
I believe the split will only benefit Callaway, as its business is solid and doesn’t justify such a low book value on a forward basis. After Topgolf is separated, Callaway will no longer carry the associated risks, which will likely make investors feel more confident and secure in their investment.
I also believe it’s crucial for Callaway to retain the Toptracer technology, as it’s one of the best tracking systems available. Many new driving ranges and golf courses are eager to incorporate this technology into their facilities.
Topgolf
Like many capital-intensive businesses, Topgolf is a high-risk, high-reward company following the split. The company is still expanding by opening new venues worldwide, particularly in the United States, so growth is ongoing. However, recent financial reports revealed that Topgolf’s same-venue sales declined by 8% in the first half of 2024 compared to the same period in 2023.
Despite this, the divergence in business models between Callaway’s traditional equipment focus and Topgolf’s entertainment-driven venues seems to have caused investor uncertainty, making it difficult to evaluate the combined company’s true value.
Another challenge is the profitability of individual venues. While some, like the one in Las Vegas, are thriving, others haven’t been as successful.
Topgolf appeals to a wide range of people, especially those looking to introduce younger generations to golf in a fun, social setting. For families or groups of friends, it’s an enjoyable way to spend an hour without breaking the bank. The games they offer are engaging and accessible for golfers of any skill level.
However, for serious golfers, Topgolf can feel expensive. Without special deals, it costs over $40 for just an hour at the driving range. The food is also pricey. So when it comes to improving one’s game, Topgolf falls short. The ranges are short for hitting drivers, the tees are fixed and only a quarter inch high, and there’s no putting practice available.
So, while Topgolf excels as a social venue, it may not provide the best value for serious golfers who could potentially find more value in other entertainment options or restaurants for the same amount of money.
Final Thoughts and Future Perspectives
The split appears to be a promising move. However, for investors to fully reap its benefits, it’s crucial that Topgolf maintains strong consumer interest and traffic. The biggest risk lies in a potential slowdown in consumer spending. While the post-COVID surge in activity at Topgolf has tapered off, the company must focus on retaining its existing customer base while strategically expanding its footprint with new venues.
Possible Strategy for Topgolf
Expanding Topgolf Swing Suite, the brand’s golf simulator business, could present a valuable opportunity. Integrating golf simulators into existing Topgolf venues could generate additional revenue, while opening more standalone Swing Suite locations might also be a smart growth strategy.
Another drawback of the Topgolf business model is the significant increase in surrounding land prices when a new venue opens, a trend that rarely benefits Topgolf directly.
To address this, Topgolf might consider purchasing a large piece of land at strategic locations instead of leasing it. Alternatively, partnering with real estate developers to create multi-use complexes featuring entertainment, shopping, and accommodation alongside Topgolf venues could unlock new revenue streams, including better lease agreements or real estate income over time.
Outlook
Overall, the outlook appears promising for both Callaway and Topgolf. With Topgolf becoming debt-free and holding $200 million in cash, this move positions both companies for significant future growth and strong upside potential.
FAQs about Topgolf Callaway Split
Why did Callaway and Topgolf decide to split?
The split was initiated to allow both companies to focus on their core businesses and pursue independent growth strategies. This separation aims to unlock value for shareholders by enabling Callaway to concentrate on its golf equipment and apparel business while Topgolf focuses on expanding its entertainment venues and technology offerings.
How will the split impact Topgolf’s operations?
Topgolf will operate as an independent company with a stronger financial foundation, becoming debt-free and holding $200 million in cash. Callaway will own 19.9% of Topgolf for a potential upside.
What does the split mean for Callaway investors?
The split enables Callaway to concentrate on its golf equipment, apparel, and lifestyle businesses without being tied to the operational demands of Topgolf. This clearer focus is expected to drive growth and improve long-term value for Callaway investors.
What are the potential risks for Topgolf post-split?
One potential risk for Topgolf is maintaining consistent consumer traffic and spending. As post-COVID growth slows, the company must focus on retaining its existing customer base, attracting new visitors, and strategically expanding its venue portfolio.
About the Author
Authors of this article have extensive experience in strategy and consulting, having worked at leading firms, including MBB (McKinsey, BCG, Bain) and Big 4 consulting firms. Currently, they work at Sportainment Consulting, focusing on the intersection of sports, entertainment, and business.
They regularly analyze and write about the business strategies and models of companies in the Sports, Entertainment, and Leisure industries, offering valuable insights into the evolving dynamics of these sectors.
