Drive Shack: A Mini Golf Play

Drive Shack first caught my attention when I learned that Wes Edens, a co-founder of Fortress Investment Group and co-owner of the Milwaukee Bucks served as the Chairman of the Board.

While Drive Shack's historical performance has been tumultuous, the company has recently made a huge pivot from American Golf, its legacy business, where it owns, leases, and manages 56 courses. It is transforming into an entertainment operating company, with Drive Shack - a Top Golf inspired theme and Puttery - an adult in-door putting experience with drinks.

As seen above, Drive Shack's future depends on the Puttery business. By the end of 2024, they expect to open 50 locations. With an estimated development cost of $7M - $11M for each location, that means $350M - $550M in debt financing, which is greater than the current valuation of the business.

The economics of the Puttery business is similar to restaurant chains like Shack Shake or McDonald's. There's an upfront cost in time and money, which is required to develop the Puttery location. Then, after opening, profits are used to pay back debt and/or are re-invested into new locations.

The closest comparison to Drive Shack is Topgolf, which was recently acquired at a $3.1B valuation, with around 60 venues across NA. Callaway's management cites that a Topgolf location does $17M in sales, with $5M in profit, and costs upwards of $40M to build a location. Those unit economics are close to what Drive Shack cites for its DS venues.

From a business standpoint, Puttery is more attractive. It takes less than 1/2 the time in time, about a 1/4 the time in cost, and ultimately provides a 25 - 40% yield on investment.

So if Drive Shack can open 50 venues by the end of 2024, their end of 2024 run-rate will be $100 - $150M in EBITA, with each location being able to break even in costs within 3 - 4 years.

I think the right way to value the Drive Shack business is by looking at Topgolf's acquisition. Topgolf was acquired at $3.1B with 60 venues doing roughly $4 - $6M in EBITDA, which means the business was valued at ~10x EBITDA. Drive Shack's business would be worth a comparable $1.5B by the end of 2024.

That's a 650% return in 3 years with a $200M market cap today. The play I'm more interested in are the $2.50 Jan 19 24 call options. I can buy them at $0.60/share today, which means that I'm paying for the option to buy shares at $3.10 at the start of 2024.

The target price at the end of 2024 is $15.75. So if the shares land anywhere north of $6 by the start of 2014, I'll make a similar return.