Should Callaway Sell Its Equipment Business?

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Hey Golfers —

A report from South Korea last month said that Topgolf Callaway Brands is looking to sell its Callaway Golf equipment business.

It is important to note that South Korea is heavily invested in the equipment space, with ownership stakes in two of the largest OEM companies.

• Seoul-based Centroid Investment Partners acquired TaylorMade in 2021 for an alleged price of $1.7 billion.

• South Korean company Fila Holdings Corporation owns 52% of Acushnet.

Over the last several months — I have heard rumblings from business folks within the industry that Topgolf Callaway Brands was evaluating a sale of its equipment business. The report was consistent with what I was hearing.

Callaway issued a statement upon the report coming out. Below is what it said.

It is relatively unusual for a public company to issue a statement like Callaway did.

Since the original March 20th report, no other reports have come out to confirm that Topgolf Callaway Brands is indeed evaluating a sale of its equipment business.

One last important item in the original report was that Topgolf Callaway Brands’ three largest shareholders are evaluating selling their shares in the company.

• BlackRock Advisors — 12.7%

• Providence Equity Partners — 11.5%

• Thomas Dundon — 10%

Time will tell if the report is legitimate. It could also have been leaked by several different firms for different motivational purposes.

For example — and this is pure speculation — the three largest shareholders could be unhappy with the stock's performance and would like to see Topgolf Callaway Brands make changes.

BlackRock owned 13 million shares — or about 7% ownership in 2022. They now own 23.38 million shares — or about 12.7% ownership of the company. An increase of 80% in ownership in just two years.

The share price on December 31st, 2021, was $27.44. Topgolf Callaway Brands is currently trading at $16.00 per share.

Should Topgolf Callaway Brands sell its equipment business?

Let’s look at the numbers.

The report valued Callaway’s equipment business at $3 billion. In 2023, Callaway recognized $1.3 billion in equipment revenue.

From a capital allocation standpoint, the Callaway equipment business is much different from the Topgolf business. Growing Topgolf’s business requires a significant investment to build a new venue.

You could make a case to separate the businesses on this information alone.

I am a fan of Topgolf, the golf entertainment brand, but I am relatively indifferent to its business model.

Topgolf is a net positive for the golf industry. In 2024, it will have around 30 million unique visitors across all of its venues, which translates to around 300,000 unique visitors per venue.

Topgolf introduces millions of golfers to the game. But the rub is how many convert to green grass golf. That is an important metric for Topgolf Callaway brands because it will support its equipment business. And if that number is on the low end, does it make sense to operate the two different businesses under one umbrella?

The economics of Topgolf are capital intensive. To succeed in the long term, it must consistently grow the same venue sales. Topgolf has seen declines in same-venue sales in the last two quarters.

The problem that needs solving is getting golfers who participate in golf entertainment aspects and funneling them to green grass golf. What does that look like, and what will the bridge be?

Some investment analysts state there are very few synergies between Topgolf and Callaway. I don’t totally agree with that statement. But I do think the acquisition has been more challenging to execute than Topgolf Callaway Brands originally anticipated when it closed three years ago.

Topgolf has over 90 venues — they have the largest captive audience in golf. Yet they don’t appear to be selling through a material amount of equipment and apparel at Topgolf locations.

Companies like Club Champion and True Spec have had success with their brick-and-mortar fitting locations. Has Topgolf evaluated a similar model with Callaway equipment? Club Champion and True Spec are agnostic with their equipment.

Distribution is incredibly important in building and growing a business. A couple of months ago, I wrote about the unique opportunity that Topgolf provides Callaway. It has been three years since the acquisition, and we haven’t seen Callaway lean into Topgolf selling equipment.

Selling equipment through Topgolf locations may disrupt its current channels and hurt its relationships with retailers.

It’s certainly possible that Callaway has tested this model in a select few Topgolf venues and has seen positive results. However, the golfer who visits Topgolf may not have the right buyer persona.

I still contend that Callaway has enormous value with Topgolf from a distribution channel. If the company knows it can’t leverage the Topgolf audience into Callaway equipment customers — it would make sense to split the two companies.

But I am not sure Callaway knows the answer to that yet. Just two months ago, they laid out a full page of Topgolf Callaway synergies on its investor deck.

Topgolf Callaway Brands has a fiduciary responsibility to its shareholders if they receive an investment offer. However, I don’t believe the company is actively shopping the equipment business.

While the share price has been disappointing the last couple of years, I do not believe Callaway should sell its equipment business until it has exhausted all opportunities to leverage Topgolf to aid in equipment revenue.

Have yourself a great Monday. Talk to you next week!

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