Shares of Callaway Golf (MODG -2.50%) have traded sharply higher in June after hedge fund Jana Partners disclosed a 9.5% stake and its intention to advocate for changes including a potential sale. Callaway is an iconic maker of premium golf clubs -- selling individual clubs for as much as $700. In addition to being an industry leader and top seller of golf clubs and balls, Callaway also offers apparel and accessories related to golf and active lifestyles.
Despite the company's strong arsenal of consumer brands, its share price has lagged the overall market, especially since the company's acquisition of Jack Wolfskin was announced in November 2018. The investor reaction to Jana's stake may be a reflection of a desire to see the company sell its non-core assets or address other operational issues that have contributed to the stock's underperformance.
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Jana's playbook
Jana Partners is a highly regarded activist hedge fund. The investment firm has successfully advocated for change at several high profile companies, including Tiffany & Co and ConAgra Brands. Notably, Jana was able to push companies like Whole Foods Market and Pinnacle Foods to sell themselves.
Given Jana's impressive track record, investors have high hopes for its ability to successfully advocate for change at Callaway. Jana's 9.5% stake will lend it considerable influence as it now ranks as the company's second largest shareholder.
We can glean some insight as to why Jana has made its investment in Callaway by looking at the SEC filing disclosure:
[Jana] intends to have discussions with the Issuer's board of directors and management regarding the Issuer's portfolio composition; strategic alternatives including exploring a sale of the Issuer or asset divestitures; capital allocation and acquisition strategy; operating performance and cost management; and governance.
The language in the investment disclosure makes it clear that Jana sees an opportunity to monetize the company's assets through a partial sale or auction for the whole company. Jana will probably also seek to have its representatives join Callaway's board. The investment firm is working with several experienced consumer industry executives on this investment including a former Nike executive. Based on these initial disclosures, Jana has big plans for Callaway, and taking a look under the hood reveals that Callaway has several valuable assets that can be monetized.
Callaway's valuable assets
In addition to Callaway's core golf business which in and of itself is quite valuable and would be an attractive acquisition to a number of sporting goods companies, Callaway has at least two other businesses that could be sold separately.
One is the Jack Wolfskin business that was just acquired a few months ago. Callaway acquired it for $476 million -- a large acquisition for a company like Callaway with a less than $2 billion market capitalization. Ever since the deal was announced last November, analysts have questioned its merits.
Callaway's core golf business sells highly engineered products that are substantially differentiated from competing brands and as a result enjoy pricing power and healthy profit margins. In contrast, Jack Wolfskin is primarily an apparel and footwear business. The apparel and footwear industries are extremely competitive, and the Jack Wolfskin brand cannot claim any sort of market leadership -- in other words, it's not as attractive a business as Callaway's core offerings.
Given that Callaway only recently acquired Jack Wolfskin, its acquisition price is a good marker for what the business could be worth. Although Callaway may have to sell it for a discount if it wants to divest the business quickly.
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Callaway's Topgolf stake
The second asset is Callaway's minority ownership stake in Topgolf. Topgolf is a premium golf driving range concept designed to entertain groups of people with golf and a full bar. Topgolf turns golf into an experience similar to visiting a bowling alley for a night out with friends. This unique twist on golf has really caught on in some parts of the United States and is growing rapidly.
Some industry analysts believe that Topgolf's business is worth as much as $6 billion. Callaway owns more than 10% of Topgolf which implies that its stake could be worth several hundred million dollars. However, because Callaway owns a minority ownership stake, it does not include Topgolf's financials in its income statement reporting.
There have been rumors that Topgolf could IPO in the near future, and given the company's strong growth, Callaway should be able to find a buyer for its stake.
Positive response
As you can see, Callaway has several valuable assets that are strong candidates for divestitures, not to mention a sale of the entire company. Adding Jana's strong track record of corporate activism to the mix, it's no wonder that investors are bullish on Jana's involvement with Callaway.
Jana will likely seek out seats on the board of directors, followed by a review of strategic alternatives. Investors shouldn't be surprised if Callaway announces big changes in the coming year.
