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Raymond James: Callaway's Latest M&A Deal 'Dramatically' Changes Business

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Raymond James: Callaway's Latest M&A Deal 'Dramatically' Changes Business
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Callaway Golf Co (NYSE: ELY)'s acquisition of German apparel brand Jack Wolfskin has fundamentally changed the composition of the business, according to Raymond James.

Shares Dip On M&A Announcement

Callaway announced Friday that it entered into an agreement to acquire Jack Wolfskin — a brand that does not generate any meaningful revenue in North America — for $476 million.

"Jack Wolfskin is a premium outdoor brand with tremendous international reach, being a leading brand in the European market and having a substantial presence in China. It also helps Callaway expand its presence in the high-growth, active lifestyle category.”Callaway President and CEO Chip Brewer said in a statement

The deal marks the third major acquisition for San Diego-based golf equipment manufacturer since 2017 and follows the purchase of  apparel brand TravisMathew and golf accessory and apparel maker OGIO.

The Jack Wolfskin deal was not particularly well-received by investors — shares plunged nearly 15 percent on the heels of the announcement. 

Equipment manufacturer Callaway finds itself in a similar position to retailer Dick’s Sporting Goods (NYSE: DKS): a need to pivot toward apparel sales due to the limited growth opportunities sports equipment is providing.

Raymond James Stays Neutral

Callaway’s agreement to acquire Jack Wolfskin "will dramatically change the composition and investment thesis for Callaway Golf," bringing its accessory category from 23 percent to 43 percent of total corporate revenue, Raymond James analyst Dan Wewer said in a note. 

Raymond James maintains a Market Perform rating on Callaway.

“While we remain confident with management’s ability to continue to grow market share and earnings in the core golf category, the future success of ELY’s aggressive entry into specialty softlines is less certain,” the analyst said. 

The upside for Callaway from these acquisitions is the potential for faster revenue and profit growth than the core golf business can offer, according to Raymond James. 

Callaway is the market share leader in golf hard goods and the potential for further market share growth could be modest, Wewer said. The brand's previous acquisitions outside the core business have been successful, and Callaway was in search of a new revenue driver, he said. 

"It is our recommendation to Callaway that the company begin providing more financial disclosures for its accessories category now that it represents 43 percent of total revenues,” the analyst said. 

Callaway shares were down 4.39 percent at $16.76 at the close Tuesday.

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Latest Ratings for ELY

DateFirmActionFromTo
Sep 2018Cowen & Co.MaintainsMarket PerformMarket Perform
Aug 2018KeyBancMaintainsOverweightOverweight
Jun 2018KeyBancMaintainsOverweightOverweight

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