New Callaway Chief Dismisses Buyout Bids
The new chief executive of Callaway Golf Co. dismissed prospective takeover offers for the Carlsbad, Calif.-based company as undervalued and “peripheral” to fixing the business, implying that the leading golf equipment manufacturer would seek to remain independent despite two unsolicited buyout bids that sources say are on the table.
“If we do our job well, any offers that come across the transom are irrelevant,” George Fellows said in an interview with The Times last week after being installed as Callaway’s chief executive. “My charge from the board is to restore the company to the level of profitability it has traditionally enjoyed. The rest of that stuff is an unnecessary diversion.”
Fellows, who ran cosmetics maker Revlon Inc. in the 1990s but has no experience in the sporting equipment business, said the board would review any bids, as it was obligated to do. But he said prospective suitors who were trying to capitalize on Callaway’s weak performance over the last year would not succeed in buying the company “on the cheap.”
In May, buyout firm Thomas H. Lee Partners and insurance giant Fidelity National Financial Inc. made an all-cash takeover bid that valued the company at $15 to $16 a share, or as much as $1.2 billion. Last week, sources close to the partners said they had told the Callaway board they would consider raising their bid above $16 a share if they were allowed to review the company’s financial books and enter into negotiations.
Another bidder also emerged last week, these sources said, offering $15.75 to $16.25 a share for the company. They said the all-cash bid for as much as $1.24 billion came from Boston-based buyout firm Bain Capital and MacGregor Golf Co., one of the oldest names in the industry.
Callaway has not acknowledged or responded to either bid. It has confirmed, however, that it has retained investment banking firm Lazard Ltd. to assess its strategic options.
In an interview with The Times last week, Fidelity Chief Executive William Foley predicted that if he and his partner withdrew their bid, Callaway’s stock would plummet.
Several Callaway investors said the stock was probably worth little more than $12 a share without the prospects of a takeover.
They believed that the company, however, would be worth in the neighborhood of $17 a share in a sale because of the cachet of its name. It makes the Big Bertha line of clubs and acquired Top-Flite in 2003 to expand its golf ball business.
Callaway shares closed at $15.24 on Friday, down 26 cents. They traded below $11 in April.
Investors were pessimistic about the near-term growth prospects of the company.
Callaway has suffered from an industrywide slump in equipment sales as golf rounds have declined in recent years. It also has lost market share, particularly in the high-margin woods business, to lower-priced rivals such as TaylorMade.
What’s more, the company has struggled to fill a void left by the 2001 death of its charismatic founder, Ely Callaway. The board has been searching for a CEO since the ouster last year of Chief Executive Ron Drapeau amid weak results.
Analysts, however, said the company showed signs of a turnaround under William Baker, a board member who had taken the helm as interim chief executive. Last month, Callaway reported improved quarterly results and improved profitability because of increased demand for putters and irons and a rebound in sales in Japan.
Some investors said the hiring of a new CEO amid a possible takeover suggested that the board was looking for further improvements before any possible sale. Yet some investors said Fellows’ new contract gave him an incentive to sell the company. He would make $8 million in a cash-and-stock payout should Callaway be sold.
In addition, Foley, the head of Fidelity, questioned Fellows’ ability to turn the company around. “One has only to look at past records to assess future performance,” he said.
Fellows resigned from Revlon in 1999 amid sales and inventory management difficulties, eroding U.S. market share and international weakness. Revlon shares were trading at about $8, down from more than $54 the previous year.
Fellows would not discuss Revlon. He also dismissed the idea that he had a financial incentive to sell the company. “Those are fairly standard clauses in contracts,” he said of the payout agreement.
He said that any short-term drop in the company’s stock price should Foley withdraw his joint bid with Thomas Lee was “irrelevant” to his charge of fixing the company.
He said he was extremely bullish about the business prospects, predicting that baby boomers would return to the links in their retirement. In the shorter term, he said, he would find ways to better exploit international markets and licensing opportunities. He said his marketing background could be beneficial in this regard.
Fellows also said he would look to “re-engineer” Callaway to improve customer service. He pointed to the company’s current problem keeping up with demand for its new driver as damaging to Callaway’s image.
Sources say several members of top management have backed buyout bids to take the company private to escape the quarter-to-quarter pressures of Wall Street that they say have forced Callaway to hurry products to market.
