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Friends,

Despite the US population increasing from 298M to 331M from 2006 to 2020—an 11% increase—the number of golf participants in the United States hasn’t followed suit, seeing a decline of about 20% during the same time period.

What do legacy golf companies like Callaway plan to do about it?

Get aggressive.

Through $750 million in acquisitions of premium apparel, footwear, and equipment brands like Jack Wolfskin, TravisMathew and Ogio, Callaway has desperately attempted to diversify their business and cater to a younger demographic which seems to be losing interest in golf — or never picked it up in the first place.

Check out how Callaway’s annual revenue has responded (Source):

Which brings me to my next point — Callaway is doubling down on diversification.

On Tuesday, Callaway announced a definitive merger agreement which would see the Golf giant digest the remaining 86% of Topgolf they didn’t already own — at a ~$2 billion valuation.

Here are the details:

• It’s an all stock deal which gives Topgolf an implied equity value of ~$2 billion.

• Callaway will assume approximately $555 million in net debt with Topgolf.

• Callaway’s existing shareholders will own about 51.5% of the combined firm, with the remaining 48.5% going to Topgolf’s own investors.

• Callaway is issuing about 90M shares to facilitate the merger — stock is down about 20% in response.

• Callaway has invested in Topgolf twice already, in 2006 and 2018, amounting to an existing ownership stake of about 14%.

Along with the announcement, Callaway released a 30-page presentation giving rare insight into Topgolf’s existing ownership structure, financials, and projections.

Being the good friend I am, I read it so you don’t have to — let’s run through it.

(📸 / Topgolf)

Topgolf Overview

Founded in 2000, Topgolf has reinvented the concept of golf’s antiquated driving range to attract both golf aficionado’s and novices alike, turning it into a destination venue for people to play technology-enabled golf games accompanied by music, food, and drinks.

The best part?

Their unique approach is working.

According to Axios, “18–34 year olds represent 25% of on-course golfers, but 40% of the 9.9 million off-course golfers (i.e. Topgolf).”

Bottom line — Topgolf has developed a unique way to engage an entire new generation of individuals that weren’t interested in golf before.

From a financial perspective, Topgolf did $1.1 billion in revenue last year and is growing at a 30% CAGR since 2017.

• 2017 Revenue: $630 million

• 2018 Revenue: $862 million

• 2019 Revenue: $1.1 billion

The majority of Topgolf’s revenue comes from physical locations, but they also have a growing technology business, which Callaway envisions being a significant source of revenue in the future.

Venue Breakdown & Economics

Topgolf has 58 U.S. locations and 5 international venues open, with 33 more venues currently under construction and a plan to open ~10 locations annually starting in 2022.

Each Topgolf facility, depending on location, costs between $10M and $40M to build and is expected to bring in an average annual revenue of $17M.

On a percentage basis, over 95% of Topgolf’s revenue is broken out evenly between gameplay, events, and food & beverage — which is interesting considering a typical driving range might hardly make any money off food & beverage or events.

Here’s a good look at the economics of an average Topgolf location:

Toptracer Range Technology

In addition to unique physical locations, which currently drive almost all of Topgolf’s $1.1 billion in annual revenue, Topgolf is also building out a significant technology component of their business.

What am I talking about?

Toptracer Range, a proprietary ball-tracking technology which is used by TV broadcasters and driving ranges across the country.

(📸 / Toptracer Range)

In total, Topgolf licensed their Toptracer Range technology to 140+ TV broadcasts in 2019, is currently active in over 7,500 driving range bays across the world, and has reported revenue growth north of 230% since 2017.

The economics are fascinating:

• No install fee for driving ranges

• Topgolf charges ~$160 per bay per month or $2,00 annually

• Currently active in 7,500 bays worldwide, bringing in $15M in annual revenue

• Topgolf projects adding more than 3,500 bays in 2020, and around 8,000 new bays per year starting in 2022.

Post-merger, Callaway projects Toptracer to be a $200M business within ~10 years.

Now that Callaway is buying Topgolf at a $2 billion valuation, a 50% haircut to their projected IPO price earlier this year, what’s the plan?

It’s not exactly clear yet, but i’d expect more of the same.

Callaway already had an exclusive relationship with Topgolf, which put their clubs, merchandise, and apparel in every location worldwide, but you can expect Callaway penetrate that relationship even more.

Topgolf is a growing and potentially large business that Callaway appears to have acquired at a good price, but that’s only part of the equation.

The demographics making up Topgolf’s customer base is exactly where Callaway is lacking.

It’ll be fun to see how creative Callaway gets in an attempt to funnel recreational driving range visitors into legitimate customers for their existing brand.

You can read the full Callaway & Topgolf investor presentation here.

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Extra Credit

Tech entrepreneur Ryan Smith purchased a majority stake in the Utah Jazz yesterday, which values the team at $1.6 billion.

ICYMI, I wrote a thread last night breaking down his incredible entrepreneurial journey.

If you haven’t seen it, check it out — it’s worth the read.

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