Rumors are swirling about a potential deal involving Topgolf Callaway Brands (MODG 3.03%), leaving investors dreaming about above-par returns. Shares of the golf and entertainment company climbed 13.6% in March, according to data provided by S&P Global Market Intelligence, as the market digested buyout talk from overseas.
Will Topgolf get a merger mulligan?
Topgolf Callaway was formed by a 2021 merger that, although seemingly logical at the time, has not been a hit with investors. Callaway is one of the most storied names in golf with a full line of products including clubs, balls, and apparel. Topgolf, meanwhile, is a chain of golf-related entertainment centers catering to consumers who enjoy swinging the club but who might not want to commit to playing a full 18 holes.
But the company has struggled to stay in the fairway, and shares have lost about half of their value since 2021.
Now, the company's largest shareholders are reportedly considering unwinding what they put together. South Korea's Chosun Daily said that major TopGolf shareholders including Blackrock Advisors, Providence Equity Partners, and Thomas Dundon, who together own about one-third of the company's shares, have put the Callaway side of the business up for sale.
According to the report, the shareholders are considering spinning off Topgolf as an independent entertainment company and selling the golf equipment business. A South Korean investor, according to the report, is among the potential bidders.
Is Topgolf Callaway a buy on merger talk?
Deal talk understandably has generated some excitement among investors, but caution is warranted here. For one, the rumors seemingly have not made it across the Pacific and have not yet been confirmed by any other media source. And Topgolf Callaway issued a statement dismissive of the report, saying it is "not aware of any such discussion" about a breakup or sale.
Left on its own, Topgolf Callaway management has a tough task ahead of it. While the Topgolf locations are popular, it has not translated into oversized profits so far. Golf appears to be enjoying a bit of a resurgence in the United States, and remains popular in Asia and elsewhere, but there is a lot of competition among equipment and apparel makers on top of the competition among entertainment venues.
The hoped-for synergies between the apparel side and the entertainment side have not yet justified the merger, which might explain why there are rumors about a breakup. Even if major holders can't force a split, they could be at least trying to consider their options.
Investors should evaluate Topgolf Callaway on its own merits, and not based on deal talk. A sale could still happen, but if it doesn't this stock is unlikely to remain elevated for long.
