On March 8, golf equipment giant Callaway (MODG -2.84%) finalized its merger with sports entertainment and technology company Topgolf. Prior to closing the deal, Callaway already owned 14% of Topgolf, and it acquired the remainder in an all-stock transaction.
While investors still only have limited insight into the merged entity's financials, the combination of these businesses makes Callaway a much more compelling investment.
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Topgolf is an entertainment experience
Topgolf is a great funnel for non-golfers into the golfing world. Separated by multiple floors and numbered "bays," families and groups come to Topgolf as an entertainment venue more than anything else. Each group pays an hourly rate to reserve a bay, where they are treated to a variety of golfing games, comfortable seating, and table service to make the experience more enjoyable.
With its numerous amenities and bar-like atmosphere, Topgolf serves as a unique introduction to the sport. Roughly half of all visitors to a Topgolf location in 2019 categorized themselves as "non-golfers." However, after their experiences, many of them began to develop an affinity for the sport. According to a Topgolf survey, 75% of its non-golfer customers expressed interest in playing on an actual course within the following year.
With only 65 locations around the globe currently, Topgolf clearly has room for venue expansion both domestically and internationally. And even though the concept has demonstrated strong growth on its own, the capital that Callaway has available should help propel Topgolf's expansion.
A look under the hood
There's more to this acquisition than first meets the eye. Not only does Callaway generate revenue from Topgolf's venues, but it also will reap profits from its Toptracer technology.
Toptracer tracks golf balls after they're hit, helping both golfers and viewers follow the results of each swing. While its most notable use is for tracing the paths of balls on televised golf, it's also being deployed in driving ranges around the world. Driving ranges are eager to install the technology as it helps them enhance the customer experience.
Despite already being installed in more than 7,500 range bays around the world, management estimates that Toptracer has only reached about 1% of its total addressable market. As more and more driving ranges adopt some form of ball-tracing technology to keep up with their peers, this part of the business should continue to grow rapidly.
Promoting the Callaway brand
In addition to the boost Callaway will see from Topgolf on its own, there are also opportunities for cross-selling. Most Topgolf locations also contain pro shops where golfers can find new clubs, bags, apparel, and other gear. Since the majority of Callaway's revenue still comes from equipment and apparel sales, owning those outlets gives it a great opportunity to get enhanced exposure to a massive audience.
In 2019 alone, Topgolf served more than 23 million customers. Some of them leave those venues with aspirations to play more golf, and as they pass the pro shops on the way out, Callaway's range of brands will be front and center on the shelves.
Between Callaway's leading position in the industry and Topgolf's unique customer experience, management claims there is a "clear line of sight to more than $1 billion in adjusted EBITDA" (earnings before interest, taxes, depreciation, and amortization). While the company did not place a time frame on that projection, Callaway now boasts the largest consumer ecosystem in the industry by far, so management's projections might not be too far-fetched.
Investors should keep an eye on Callaway as it begins releasing its combined financial numbers. If management's rosy forecasts come to fruition, the company's current market cap of $5.2 billion will look awfully cheap.
