In 2020, Oliver Brewer III made a foray into processed poultry on the bet that food service would be the next growth story for his sporting goods empire.
Brewer, the longtime chief executive of golf equipment stalwart Callaway, saw an opportunity in the booming number of rounds played during the pandemic. That year, he paid $2bn in Callaway stock to buy Topgolf, a chain of “gamified” driving ranges whose revenues were growing 30 per cent a year.
“However you interact with golf, our company will have the best offer,” Brewer said when announcing the effective merger of equals.
Topgolf brought in younger, more casual players who liked not just the lighter competition that came with hitting shots among friends, but what was, at its core, a sports pub environment that featured craft cocktails and fancy bar snacks. Including large quantities of chicken.
“I never thought I would actually be listening to the cost of chicken wings going up. But evidently, they did,” Brewer said in 2022, a year after the merger closed, tacitly admitting that the new Topgolf Callaway Brands was now operating in a much different industry.
That foray into the hospitality business has since proved disastrous. Topgolf’s growth has reversed as the pandemic economy normalised and inflation emptied out middle class wallets.
In its most recent quarter, Topgolf’s like-for-like sales dropped 8 per cent and Callaway projected that the rest of the year looked similarly bleak.
Just after the Topgolf acquisition closed in March 2021, Callaway’s market capitalisation jumped to $6bn. Today its group equity is valued at just $2bn, even as the legacy Callaway golf club business has remained resilient.
Adding to the pain, shares of arch-rival Acushnet, the maker of Titleist and FootJoy golf products, have soared as Topgolf has struggled.
In September, Brewer said Topgolf would be spun off from Callaway, acknowledging that investors never warmed to the combination and that the differences in the two business models were irreconcilable.
It was a humbling for a man who was made to be a golf executive, down to his nickname, “Chip”.
Brewer’s father was a top amateur player who was among the club leaders at Pine Valley, the ultra-exclusive links in New Jersey widely considered to be America’s best golf course. The younger Brewer was good enough to play college golf and has prevailed occasionally in club championships.
After earning an MBA at Harvard, Brewer made his way up the ranks to become CEO at Adams Golf, then a boutique club maker in Dallas. But another golf concept was getting attention in North Texas.
Erik Anderson, a Dallas financier, had acquired the rights to a technology developed by two brothers in the UK that embedded a microchip in golf balls to track their movement. Anderson’s West River Capital went on to commercialise what would become Topgolf, which would also pick up big backers Providence Equity and Thomas Dundon, the Texas subprime auto finance billionaire.
By the time Brewer joined Callaway in 2012 as chief executive, the San Diego-area company had already been a Topgolf investor for six years. Callaway itself was known for its space age golf clubs, starting the revolution in metal woods with its Big Bertha driver in the 1990s.
Brewer eventually decided to develop golf balls to take on the sector leader, Titleist, and also made two notable apparel brand acquisitions, Jack Wolfskin and Travis Mathew.
The company was never worth more than a few billion dollars, but its board attracted luminaries including Adebayo Ogunlesi, the private equity billionaire and John Lundgren, the longtime CEO of Stanley Black & Decker, each serious golfers.
By 2019, Topgolf had around 60 venues and sought to add around 10 per year. But the expansion was extremely expensive. Each range cost around $30mn to construct and Topgolf was borrowing heavily to pay development costs.
Debt matured during the pandemic and the Callaway acquisition functioned almost as a Topgolf bailout with the club maker’s strong cash flow directed to the driving ranges. Between the apparel businesses that Callaway acquired and the driving ranges, golf equipment was eventually projected to slide to a quarter of group sales.
At the investor event in early 2022, Callaway said that its combined annual operating profit could go from $450mn to $800mn. Executives shared a slide arguing the new company could be favourably compared with the likes of Amazon, Tesla and Chipotle which traded at nearly 20 times cash flow.
The implication was that Topgolf Callaway could soon approach a $15bn valuation.
“The board had a shockingly unsophisticated understanding about valuation,” said one person involved in the 2020 merger negotiations, alluding to the inflated sense of how public market investors would buy the hype around Topgolf as a cash flow generator.
This person added the board had been considering a multibillion-dollar offer from a blank cheque vehicle sponsored by Michael Klein, the swashbuckling Wall Street dealmaker.
From the time of the deal announcement, Wall Street analysts immediately telegraphed their concerns about Topgolf’s capital intensity.
The company was spending more than $200mn a year in capital expenditures to build the 10 new ranges per year. Callaway insisted that the “unit economics” — essentially how much recurring revenue would follow the construction period — would easily justify the outlays.
Each facility required less than $10mn of equity from Topgolf and would generate nearly $5mn of annual cash flow, what it described as a 50 per cent “cash on cash” return.
But Topgolf’s financing structure would prove complex for investors to follow. Topgolf, after building a facility, typically then sold it to real estate investment funds to whom it then owed rent payments. Today the value of the capitalised debt associated with those leases alone is around $1.5bn.
Callaway’s financial statements now feature unusual terms such as “embedded cash flow”, “deemed landlord financing obligations”, and “Reit adjusted net debt” and the company has struggled to convince shareholders of the earnings and cash flow prospects of the business.
After the spin-off, Callaway will retain around $1bn in financial debt while Topgolf takes $200mn of cash and all driving range leases. The company says a standalone Topgolf will be at least modestly free cash flow positive. The remaining Callaway will stick to “avid golfers”, Brewer recently said.
How receptive public markets are to a standalone Topgolf is unclear and the company may be hoping a buyer arrives. The private equity powerhouse Leonard Green Partners has taken a 3 per cent stake and has shared its feedback with the company.
The recent difficulties have been blamed on a softening economy that has pinched consumers and forced belt-tightening at businesses now less willing to hold midweek corporate events.
But there is the more ominous worry that the 30mn casual golfers in America will just move on to one of the many Topgolf copycats — Puttshack, PopStroke, and 5 Iron.
“Running a hospitality business is different than running a golf manufacturing business,” said Megan Alexander, a research analyst at Morgan Stanley.
