Behind the TaylorMade sale: 5 big questions about the acquisition

May 11, 2017

Adidas’ year-long quest to sell off TaylorMade Golf was finally realized Wednesday, with KPS Capital Partners agreeing to purchase the company for $425 million. (Half of the sale price will be paid in cash, the other half in secured notes and contingent considerations.) For perspective on the sale, we spoke with Casey Alexander, a senior vice president and research analyst at Compass Point Research and Trading, LLC, who has closely followed the golf equipment industry for more than two decades. In a wide-ranging conversation, Alexander addressed the sale price, Tiger and Rory, and more. What would a private equity firm like KPS typically look to do with a company like TaylorMade?

Alexander: That’s a good question. Since none of us on the outside have a peek at the books, we can’t be certain of what TaylorMade’s profitability is. It’s now doing less than a 1 billion a year in Euros, but it has all the infrastructure built for a larger enterprise. Winding down that infrastructure is extremely expensive. A private equity firm would look to cut expenses as fast as it can and bring that business to profitability. It’s a tough trick to grow your business while simultaneously shrinking infrastructure. That’s what the equity firm is trying to do. [ED NOTE: TaylorMade-adidas Golf’s net sales were 1.34 billion Euros in 2012; 1.28 billion Euros in 2013; 913 million Euros in 2014; 902 million Euros in 2015; and 892 million Euros in 2016.]

Some observers have said that the sale price of $425 million seemed low. Would you agree?

It’s an impossible statement to make unless you know the profitability, or unprofitability, of TaylorMade as it exists today. That’s just spit-balling. If you compare its valuation to Callaway or Acushnet, it’s much lower. But it’s hard to read between the lines without a balance sheet. We have nothing beyond Adidas’ aspiration to get this deal done.

Is the new owner likely to restructure significantly?

No, I believe the current management at TaylorMade is part of the transaction. Will they downsize over time? Almost certainly. But I don’t see a house-cleaning. KPS [Capital Partners] isn’t in the business of running golf companies. TaylorMade management is.

The timing was interesting given TaylorMade had just announced a day earlier that it had signed Rory McIlroy to its Tour-pro roster. The McIlroy deal was undoubtedly part of the KPS negotiation, right?

That’s what people thought when Tiger announced his deal on the eve of the PGA Merchandise Show [in January] — people thought a TaylorMade sale was coming. But a deal for Rory is a competitive deal. You have to sign it when you can. You can’t get it in place and them ask him to hold off for four months. When he says, “I’ll sign,” you sign him. At the moment, they are looking at everything through a positive lens. [KPS] laid out $200 million in cash. That’s what they have at risk. If it doesn’t work out, that’s what they lose. I look at [the deal] as Adidas taking back equity. They got a secured note plus a contingent payout. The reality is, the back half of this deal, Adidas is taking back equity. It only works if KPS increases the value of TaylorMade.

Adidas is taking back a note, plus a deferred payout. In a sense, they’ve still taken an equity position in TaylorMade. They still have a big bet on the success of TaylorMade. We also don’t know what type of balance sheet they’re sending over, along with TaylorMade. They may have only had money to keep it going for a limited amount of time.

It’s a complicated transaction. It’s a secured note. Secured by what? Cash flows of the company? Planned equipment? That would be better, but it depends what the note is secured by. We won’t learn that for a while, but those details always leak out.

What kind of value do superstars like McIlroy and Woods add to an equipment company’s bottom line?

If you look at what [TaylorMade] is doing, it’s like they’re in a blackjack game and they’re doubling down, specifically with the contracts with Rory and Tiger. Those are expensive commitments. Those have to pay off, or you’re going to have significant operating problems going forward.

If Tiger Woods gets his health back and becomes competitive, he’ll bring eyeballs to the television. If Rory starts winning, he’ll bring eyeballs. Golf is going through what I might call a “NASCAR-ization.” Tiger is playing TaylorMade clubs, wearing Nike clothes and using a Bridgestone ball. The whole industry is heading this direction. If Tiger wins, who gets the credit? If you look at Rory, the apparel deal is $200 million, the club deal is $100 million. I don’t think anybody knows if these deals are worth it, but it seems to me that when you start bifurcating it has to be less worth it. It certainly can’t be better!