Why Apollo Global Is Buying ClubCorp for $1.1 Billion

On this Market Foolery segment, host Chris Hill and Million Dollar Portfolio's Jason Moser size up the news that ClubCorp (MYCC) is about to go private. The golf-course niche broadly has been in a slump since 2003, but what it does have going for it is a large, installed membership base that gives it fairly a steady stream of income. And it's the kind of business that could benefit from being out from under the short-term-focused glare of the stock market. The questions are, how good is this deal for the Apollo (APO), and for the target? And might there might be another bidder waiting in the wings?

A full transcript follows the video.

This video was recorded on July 10, 2017.

Chris Hill: Two news items from the world of sports. ClubCorp shares are up 30% today. ClubCorp is one of the largest operators of private golf clubs in the United States. Apollo Global is buying ClubCorp for $1.1 billion. I'm assuming that's a good price, only because shares of Apollo are up a couple of percentage points, and I guess if you're a ClubCorp shareholder, you're having a good day.

Jason Moser: It's a decent price. I think if you're a ClubCorp shareholder, you're probably thinking that perhaps a better price is out there. But it's a very interesting space. I have worked at a ClubCorp club before, when I was in the golf business. We were members of one growing up. It's a nice sort of situation. I think it's the best way for golf clubs to exist, is to be part of that membership family of a bigger sort of umbrella company there. And we're seeing that is clearly the direction this is headed. More and more country clubs are becoming members of those ClubCorp-style families. It's just an easier way to spread costs around and really utilize scale as a big advantage, which is a meaningful advantage in this business.

But I think with Apollo, they see a large installed member base, and that, in turn, brings nice recurring revenue in the form of monthly membership dues. It's a pretty easy hurdle to clear for membership, too. These aren't your top-of-the-line member-owned equity clubs where you going to pay a $25,000 initiation fee to get in. There are reasonable initiation fees to getting into these clubs, and pretty easy monthly due bills to pay as well.

I think with ClubCorp, they've done a good job of building up a family of good golf courses. The biggest problem with golf as seen in the U.S. here recently is an oversaturation. We've clearly had too many golf courses for not enough golfers. You saw a lot of golf courses that are really struggling. But the thing is, a lot of that saturation came on the public on the daily fee side. A lot of those daily fee courses that were meant to open the game up to more folks who either weren't looking to become a member of a club or didn't have the financial means to do so, it gave them an opportunity to play. But that saturation resulted in some clubs not being able to make up the cost of staying open.

So the nice thing with these ClubCorp clubs is, their memberships maintain a pretty steady, consistent rate of renewal, and modest growth as well. I think Apollo sees that as a good opportunity to get this nice, sticky membership model. It's a company where, when you look at the income statement, their earnings, I think, are a little bit obscured by a lot of depreciation and amortization on the income statement, due to a lot of the property that they own. They own a lot of land, as you can imagine, with all of these golf courses. It's a very cash flow-rich company. I think today's offer shows that it's something like 7.5 times operating cash flow. I think that's probably a little bit cheap, given that historically, it's traded up toward 10 and 11 times operating cash flow. So it wouldn't surprise me, perhaps, if there was a competing bid.

But I think management in this case is going to be happy to get out of the public eye, because for a while they had some other activists in there trying to push them toward becoming a REIT and unlocking more value, as they always say. I think it's a good deal, but I wouldn't be surprised at all to see a competing bid coming.

Hill: Do you think, if Apollo offered a 30% buyout premium to Abercrombie & Fitch, they'd take it?

Moser: [laughs] I doubt it, because the logic would say you could stock your golf shop with a bunch of Abercrombie & Fitch crap, but nobody wants it, apparently.