Golfsmith Deal Par For The Course

By Sham Gad | May 16, 2012 AAA

Golfsmith International (Nasdaq:GOLF), a leading golf specialty retailer with 85 stores across the United States today announced quarterly results to little investor fanfare. While the company reported an 11% increase in revenues, operating losses grew as the company booked lease termination charges, severance payments and other one-time expenses. Yet what investors were paying attention to was not the earnings news, but the earlier announcement that Golfsmith had agreed to sell itself.

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Ace or Bogey?
Earlier this week, Golfsmith announced that it had agreed to sell itself to Canadian golf retailer Golf Town for $6.10 a share in cash. The day before the deal was announced, GOLF shares traded for $4.71, so the deal gives investors an almost 30% premium over the closing share price. The company's largest shareholder has agreed to the deal alongside the Company's management and board of directors, who together own a majority of the stock. As such, the deal is not subject to further shareholder approval. However, some shareholders have accused Golfsmith of not shopping the company around in hopes of a higher bid. That said, it's likely the deal with GolfTown will go through.

A Par Deal
For $6.10 a share, Golfsmith shares are being valued at roughly 1.5 times book value for a business that has lost money over the past three years. Earlier this year, Adams Golf (Nasdaq:ADGF) agreed to sell itself to TaylorMade Adidas for $10.80 a share, or approximately 1.3 times book value. And Adams is a profitable, debt-free business that is growing its sales and profits at a rapid clip. Margins are a lot better for a golf company like Adams as opposed to a golf retailer like Golfsmith. Another leading golf equipment manufacturer, Callaway (NYSE:ELY) currently trades at around two-thirds of book value.

SEE: Digging Into Book Value

The Bottom Line
The writing on the wall seems to be that it's tough for a pure play golf business to make it as a standalone company. Callaway is attempting to make a go of it, but all the major competitors are part of a bigger group. Taylormade and now Adams are owned by Adidas, Titleist is part of Fila Korea, and Nike (NYSE:NKE) is a multi-billion sports icon with its own golf division. Retailing is a hard business and golf retailing is even harder. The combination of Golf Town and Golfsmith will create the largest specialty golf retailer in the world. The buyout offer values Golfsmith near its 52-week high of $6.35. The only time shares traded above that level was in 2007, before the U.S. recession hit. It seems unlikely that such a share price will materialize anytime soon.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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