Golf Gets a Jolt: Topgolf Callaway Brands Soar Amidst Unexpected Merger

Shares of Topgolf Callaway Brands experienced a surge on Tuesday and Wednesday as the golf industry witnessed an incredible twist. The game that was once considered dull has caught the attention of many, thanks to the infusion of Saudi billions and a highly-unforeseen deal.

In a surprising turn of events, the PGA Tour and the upstart, Saudi-backed LIV Golf announced their intention to merge. This groundbreaking transaction also includes the European professional golf circuit, the DP World Tour. The entities involved confirmed that they will establish a new for-profit entity, effectively putting an end to the existing litigation.

Monahan has encountered criticism for his choice to merge the tours. The PGA responded to inquiries from 's and conveyed via email that Monahan has gained the support of PGA directors, including James "Jimmy" Dunne, who co-founded the investment bank Sandler O'Neill. It is worth noting that Sandler O'Neill experienced significant losses during the 9/11 attack, resulting in approximately 40% of its staff being lost. Dunne, however, did not provide an immediate response for comment.

Phil Mickelson, one of the most prominent names in golf, made headlines by joining LIV. Unfortunately, his remarks about the Saudi backers of the tour in an interview with Alan Shipnuck caused controversy. Mickelson later issued an apology. Reports suggest that Mickelson received $200 million as an incentive to make the switch to LIV. Neither Mickelson nor LIV provided a comment regarding this matter.

The Saudi Public Investment Fund (PIF) has incurred significant financial losses due to payments to LIV players and the operation of the tour, with estimates suggesting that it exceeds $2 billion. While the exact amount remains unknown, it is anticipated that the PIF will contribute "billions" to the newly merged tour, according to the PGA's statement.

This unexpected merger marks a turning point for the golf industry, breathing new life into the sport once considered monotonous. The future holds great potential as these powerful alliances come together to shape the golfing landscape.

PIF's Investment in PGA: A Game Changer for Golf Industry

That’s a lot of money, but not for the PIF, which has about $650 billion in assets and receives money from the Saudi government. The Saudi government owns about 90% of the Saudi Arabian Oil Co. (ARAMCO.Saudi Arabia), and Aramco is expected to generate roughly $120 billion in free cash flow a year for the coming few years.

Tough Competition for the PGA

It’s tough for entities like the PGA to compete with that much cash. What the PIF gets for its investment is a business that no longer loses significant amounts of money. The PGA is an established tour with TV contracts with NBC and CBS paying the tour to broadcast tournaments.

Investors can’t buy shares in the PGA, but Wall Street still seemed happy with the deal. Topgolf stock (ticker: MODG) closed up 5.5% Tuesday, at $19.30, while the S&P 500 was up about 0.2%, and the Dow Jones Industrial Average was flat. Topgolf stock was up another 1.4% Wednesday.

Immense Potential for Golf Industry

“The recent announcement has undoubtedly caught the golf industry by surprise,” wrote Jefferies analyst Randal Konik in a Tuesday report. “However, we believe that this unexpected agreement holds immense potential to elevate the sport of golf to new heights.”

More exposure for golf benefits equipment, apparel, and driving range operators. Topgolf does all that. Konik rates shares of Topgolf a Buy. His price target is $56, up almost 200% from recent levels.

Shares of Acushnet Holdings (GOLF), which owns the Titleist brand, were up 4.7% Tuesday at $48.81. Konik rates Acushnet shares Hold. He has a $41 price target for the stock.

's recently wrote positively about Topgolf, shortly after shares tanked following the company’s first-quarter results on May 9. That report included reduced sales guidance for the company’s corporate event business. Shares fell 13%, to $18.80, in response.

Conclusion

The recent investment by PIF in the PGA is expected to revolutionize the golf industry. With substantial financial backing and potential elevation of the sport, stakeholders like Topgolf and Acushnet Holdings are already reaping the rewards. Despite initial setbacks, Topgolf's stock is on the rise again, signaling renewed investor confidence. It will be interesting to see how this unexpected agreement shapes the future of golf.