Will the ClubCorp-Sequoia Deal Change Golf?

Canterwood Golf Country Club, ClubCorp Media.

This week, golf club operator ClubCorp  (NYSE: MYCC  )  revealed it will acquire peer Sequoia Golf. The move widens the company's portfolio from 108 to 157 private courses, which, it said in a press release, makes it "nearly five times the size of its next largest competitor."

While it's certainly not AOL-Time Warner in scope, the merger is significant in this industry. It will reportedly cost ClubCorp $265 million, about one-third of this year's projected revenue. Investors also responded warmly to the deal -- ClubCorp shares rose 7.4% after the announcement on Wednesday. So what's this news tell us about the industry, and the company going forward?

An industry snapshot
Broadly speaking, golf course participation and course construction have contracted in recent years, the National Golf Foundation says. Reasons for this range from expensive playing requirements to bad weather, but it's clear the decline has affected the price of golf courses.

As Bloomberg reports, the price of a regulation-length, 18-hole course reached $7.3 million before the 2007-08 recession. By 2012, that number dropped to $2.7 million before rebounding to just over $4 million per course last year. ClubCorp's Sequoia purchase, which averages $5.3 million a course, places a slight premium on this figure.

The economics at play could explain why. The NGF tells PGA.com it estimates course closures will outnumber openings for the near-term future. There were just over 14,500 golf courses in the U.S. last year, down from about 16,000 a decade ago. "As the number of courses shrinks, the number of potential buyers is starting to increase as the overall economy rebounds," the outlet adds. In other words, a shorter supply and heightened demand could continue to push prices up.

ClubCorp's focus on private clubs could also be a reason it paid a pretty penny, relatively speaking, for Sequoia. In the U.S., public courses outnumber private courses, where the typical golfer spends more than $2,000 a year, according to the NGF. Public golfers spend less than a third of that. The fact that private clubs can also charge membership fees -- and generate revenue with restaurants and private event space -- helps explain why a premium would exist.

What's ClubCorp's strategy?
To investors, analysts, and others who have followed ClubCorp, the Sequoia acquisition likely wasn't surprising. The company bought Dearborn's TPC Michigan and Charlotte's TPC Piper Glen in April, just a month after its purchase of Prestonwood Country Club in Dallas. It also acquired a trio of courses last year.

Because ClubCorp makes roughly 50% of its revenue -- estimated to hit at least $845 million this year -- from membership fees, a strategy focused on rapid growth makes sense. The acquisition of Sequoia will boost ClubCorp's total membership to 430,000 people, leading to better economies of scale and a larger presence in Atlanta, Houston, Denver, and Chicago, the company says.

But inorganic growth isn't the only tactic at its disposal. ClubCorp is also in the midst of a redesign, where it's weaning off traditional country club elitism. "[CEO Eric Affeldt] is bringing a family mentality to the clubs that for years had this image of an old men's club," a member told the Dallas Morning News earlier this year. Among the additions: more parties, cooking competitions, and even tweaks to make the golf courses easier to play, the outlet says.

To this point, it appears to be working. The company reported last quarter's revenue and EBITDA rose more than 8%, while membership was up 3%. "Our clubs are successful because they are multifaceted, multi-generational, and appeal to a wide range of members and their guests," Affeldt told analysts.

What are others in this space up to?
Many competitors -- Troon Golf, Castle & Cooke, Heritage Golf, and Boyne USA -- are privately held, so it's tough to determine exactly how they're doing financially. More visibly, though, publicly traded peers Marriott Vacations  (NYSE: VAC  ) and CBRE Group  (NYSE: CBG  )  are selling some properties. CBRE's golf division sold 15 courses in 2013, according to BloombergMarriott Vacations, meanwhile, sold Orlando's Grand Pines Golf Club for $24 million earlier this year.

Looking ahead
The future is unclear. But if the ClubCorp-Sequoia deal means anything, it's that golf course prices could be set to move higher. Demand continues to recover, supply continues to shrink, and assuming others mimic ClubCorp's redesign strategy, country clubs could look very different down the road. At the very least, Sequoia's stable of courses should become more family-friendly.

While traditionalists may object, that's OK. The game's decline doesn't appear to be temporary, and it's not solely a result of the most recent economic recession. Player participation began shrinking years earlier, even as Tiger Woods, booming drives, and better technology led to all-time highs in television ratings. But with any luck, golf won't go the way of boxing and horse racing -- once-popular sports that failed to adapt to modern times.

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