Should you buy Village Roadshow Ltd shares after its new deal?

According to IBISworld, Australian tourism expenditure is forecast to grow at an average annualised rate of 3% until 2020, driven by better global economic conditions, a burgeoning middle class in developing countries and a lower Australian dollar.

Entertainment and leisure conglomerate Village Roadshow Ltd (ASX: VRL) appears to be leveraging this theme after revealing on Thursday that it signed a letter of intent with Dallas based Topgolf. Under the agreement, Village will acquire an exclusive licence to bring the Topgolf concept to Australia.

About Topgolf

Topgolf started in 2000 when two brothers envisioned a new kind of golf experience combining competition with entertainment. At Topgolf, players hit microchipped golf balls at targets on an outfield in what is the equivalent of a large dartboard for golf. It offers a unique entertainment experience with visitors able to indulge in food and drink whilst participating in golf-related activities.

The Topgolf concept is popular in America and the UK, with 26 locations servicing around 8 million customers last year. Management indicates this figure is forecast to grow to 13 million in 2016 and 17 million by 2017, auguring well for Village’s investment thesis into this growing business.

The agreement

Village’s deal is a joint-venture licence agreement to create Australia’s first Topgolf entertainment venue in Queensland. Whilst the terms of the agreement have not been publicly disclosed, Village expects start-up costs to be approximately A$30-$35 million.

Village will contribute its equity share (of between 67 and 100 percent) via existing finance liabilities with Village paying an undisclosed licence fee to Topgolf every single year. Construction of the facility should commence shortly with management expecting a scheduled open of mid to late 2017.

Should you buy?

The joint-venture adds risk to Village’s profile, given it requires management to enter a new business segment – sports entertainment. As seen through Woolworths Limited’s (ASX: WOW) ill-fated Masters joint-venture with American hardware giant Lowe’s, a lack of management expertise in a particular area can be crippling to the wider business.

Therefore, although Village will add a new revenue stream, investors must remain cognisant of these risks before choosing to buy.

Foolish takeaway

I regard Village’s current share price as cheap given its existing business (which you can read about here). The agreement also comes at a time where Australia positions itself to fill the gap left from the unwinding of the mining boom.

This means investors might be best served moving away from traditional growth stocks BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Instead they should look to stocks like Ardent Leisure Group (ASX: AAD) and Village as exposure to Australia’s next growth engine.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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