Shares of Callaway Golf (NYSE: ELY) were down 21% as of 2:10 p.m. EDT today, after the company provided preliminary third-quarter results and announced a deal to acquire Topgolf Entertainment.
Callaway, which already owns 14% of Topgolf, will acquire the golf entertainment company in an all-stock transaction valuing Topgolf at approximately $2 billion.
Topgolf is a destination venue for people to play technology-enabled golf games, accompanied by music, food, and drinks. Callaway first invested in the company in 2006. In addition to its gaming venues, Topgolf brands include Topgolf Media, which runs online and esports games, and Toptracer, a ball-tracing technology used by TV broadcasters.
A Topgolf location. Image source: Topgolf Entertainment Group.
Topgolf generated revenue of about $1.1 billion in 2019, which has grown at a compound annual rate of 30% since 2017, according to the company release.
Callaway CEO Chip Brewer said in the announcement that the company plans to create "a larger, higher growth, technology-enabled global golf and entertainment leader" from the merger. He added that Callaway can use its financial position "to accelerate innovation, develop exciting new products and experiences, and create compelling value for shareholders."
In addition to the merger announcement, Callaway provided preliminary third-quarter guidance. Brewer said its business has been recovering from pandemic-related impacts more quickly than expected. The company said it expects revenue growth of 12% in the third quarter, compared to a 34% drop in its second quarter.
But investors are reacting to the dilution from the all-stock deal. Also, Callaway will assume approximately $555 million in net debt with Topgolf. Shareholders feel like that's a shot into a sand trap.
10 stocks we like better than Callaway Golf
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Callaway Golf wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of October 20, 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.