Former WWE Execs Set for Potentially Unique Bowlero SPAC Merger

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Bowlero—the largest bowling center operator in the U.S. and owner of the Professional Bowlers Association—is set to go public via a merger with Isos Acquisition Corp. (NYSE: ISOS) within the next several weeks. The transaction will assign the combined entity an enterprise value of $2.6 billion, but as Noble Capital Markets director of research Michael Kupinski pointed out, “A lot of the SPAC mergers [in recent months] have tended to be companies that aren’t really in a growth mode like [Bowlero is or] generating positive cash flow” like Bowlero does. While for the most part SPACs have not been tremendous performers, the outcome of this SPAC merger may be different.

JWS’ Take: Former WWE co-president and ISOS co-founder Michelle Wilson echoed Kupinski’s point, saying Bowlero appealed to her and George Barrios (also a former WWE co-president and ISOS co-founder) “because it wasn’t like every other [target in the live event, entertainment and experiential space],” she said. “It’s not pre-revenue. It’s not flying taxis. [The company has] a track record, with an amazing management team, with a cash flow machine called bowling.” Bowling is the No. 1 participatory sport in the U.S., with about 70 million people expected to bowl a game this year.

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It is important to understand Bowlero is not providing the dingy, smoke-filled bowling experience your grandfather came to love. The company took the sport and tucked it “inside of a wrapper of high design, quality service, surprisingly good F&B and made it relevant to a whole new consumer,” explained Brett Parker (president and CFO, Bowlero Corp.).

“The financial metrics of the business—the operating margin, the operating leverage that they have, the fact that a game of bowling has no cogs [or incremental costs],” Wilson said, all spoke to the strength of the business model.

So too did the “really long runway for growth.” There are upwards of 3,700 bowling centers in the U.S., and Bowlero owns just about 8% of them. Kupinski said the potential “for a roll-up strategy is incredibly attractive, especially given the [business’] economics;” which only strengthen with additional scale.

Over the last 25 years, Bowlero has gone from having one bowling alley in Manhattan’s Union Square (1997) to 322 centers nationwide. Being public will enable the company to do “more deals, faster,” Parker said.

Bowlero doesn’t have to rely on acquisitions to drive revenue and cash-flow growth, though. The company has proven that both new builds (which competitors, like Dave & Busters and TopGolf, must rely on) and the conversion of older, traditional centers into modern, upscale ones will also produce “extraordinarily high returns,” Parker said.

Kupinski noted there is still “a significant opportunity [for Bowlero] to upgrade a lot of their existing facilities.” The company currently operates 182 centers that have not yet been converted to the upscale offering. Parker said it would make sense from an ROI perspective to invest in at least half of them.

Surrounding the core leisure component of Bowlero’s business is its media arm, which includes the PBA. Today, media makes up just a small fraction of company revenues. For perspective, Parker said, “If the PBA were a bowling center, it would not be our highest-grossing bowling center.”

But there is a belief that the pro tour could one day be a meaningful customer acquisition tool and be useful in driving incremental visitor engagement. As Parker explained: “If you’re the USGA and you get a lot of people to play golf, it doesn’t actually help you very much, because you’re not capturing the economics [of those rounds]. This is a situation where [we] are the USGA and also the largest owner of golf clubs in the country.”

Bowlero has a technology arm, including its esports (see: Strike by Bowlero), sports betting and SAAS businesses, that could also be a growth driver for the company down the road. Among the tech products the company is working on is a way to gamify visits to bowling centers, give bowlers a chance to wager on their next ball (Bowlero is working through state regulators to get the game of skill approved) and drive the top and bottom line. As Parker said: “This [product] could sort of be the next-step change in bowling. Our average visitor comes 1.5 times per year and bowls two games per visit. It is not at all hard to imagine that the ability to wager [on one’s game] could easily double frequency and increase duration by half. And if you do that, the economics of the business are completely transformed.” Bowling is an extremely high margin business with little variable cost associated with a game. Increasing a visitor’s duration and frequency is essentially all profit.

Perhaps most exciting among Bowlero’s tech aspirations, at least from a value-creation perspective, is their pure-play technology business (QMS). The SAAS platform, which was originally constructed for internal use, uses AI to benchmark a company’s operating locations against one other, identify areas of improvement and provide the tactics and training necessary to implement change. Complex businesses with multiple locations (think: hotels, healthcare) would benefit from using it. “If [the roll-out] goes as well as it can go, [QMS] could be worth more than the base business pretty quickly, because you’re talking about something that goes at ~40x revenue instead of 10x EBITDA,” Parker said.

It’s worth noting that the growth opportunities on the tech side of the business have not been baked into Bowlero’s financial projections. “Whether you look at the $285 million in calendar-year-adjusted EBITDA or just the growth trajectory they anticipate, they really haven’t factored in,” Kupinski said.

The equity analyst did say he believes the media side of the Bowlero business could end up being “a really nice surprise” for investors.

That’s not to say there aren’t potential risks that could threaten Bowlero’s future. Kupinski cited the emergence of another COVID-like virus that “gives people pause to gather” or otherwise pushes consumer behavior toward at-home entertainment over family entertainment centers.

If you consider the best direct comps for the company trade at an average of 14x EBITDA (think: Vail Resorts, Live Nation, WWE, F1), Bowlero at 9.2x 2022 EBITDA sounds cheap. “If the stock were to trade in line with its peers, then the stock would be $14.90,” Kupinski said. ISOS was trading at $10.10 when this piece was published.

But the company is facing a few headwinds that are likely impacting its come-to-market price. SPACs, which were at one time hot, are now not. And as mentioned, SPACs have not performed particularly well. Some investors may believe that this one will follow the same trend. Bowling also isn’t the sexiest business that will go public this year. It is likely to take some time before the market understands and appreciates its intrinsic value.

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