2005: Newsmakers - Callaway chief: Sale talk is ‘hype’

As the new chief executive of Callaway Golf Co., George Fellows is in the hottest seat in golf. Fellows took office Aug. 1, charged with the job of continuing Callaway’s turnaround while apparently dealing with at least two bids to acquire the company.

Bain Capital Inc. and Barry Schneider, CEO of MacGregor Golf, made an all-cash offer of $16.25 per share, or slightly more than $1.2 billion, to acquire Callaway, according to an Aug. 4 report in the Los Angeles Times. That followed an earlier bid of $16 per share by Thomas H. Lee Partners and William Foley II, chief executive of Fidelity National Financial Inc.

In an interview with Golfweek, Fellows, 62, dismissed the buyout offers, saying, “The uncertainty about the ownership situation is more hype and conjecture on the part of the marketplace than it is reality, frankly.” He insisted that his mission is to “help restore (Callaway) to its level of profitability and dominance in the marketplace.”

Fellows’ employment contract calls for a salary of $850,000, an annual bonus potentially equal to his salary, and 160,000 restricted shares of common stock. He was granted the option to purchase another 400,000 shares, with accelerated vesting “upon certain change in control,” according to a Securities and Exchange Commission filing.

Whether that change of control occurs remains to be seen.

The bids to acquire Callaway, both apparently unsolicited, have highlighted sharply divergent opinions about the company in the financial community. The Callaway bulls see a strong brand that is posting improved results and has a big upside; the bears reason that golf has not been a growth industry since the 1990s, and the commoditization of products is squeezing profitability.

“For the first time in a while, I’m excited (about Callaway),” said Bud Leedom, president of LSI Equity Research and publisher of the California Stock Report. “After all these years of talking about the potential of the brand, you get the chance to possibly see it.”

Even if the acquisition bids were withdrawn, it’s “safe to say Callaway’s not going to get back to $11 (per share),” said James Hardiman, a Midwest Research analyst. “They’ve proved that they’re better than that, and it’s already been demonstrated that people are willing to pay more than that for the company.”

But Gilford Securities analyst Casey Alexander suddenly turned bearish Aug. 4 and issued a “sell” rating on Callaway. With Adidas-Salomon AG focused on its recent acquisition of Reebok, Alexander doesn’t see any obvious strategic buyers for Callaway. He reasons that if a deal is made, “it will be done by a private-equity buyer, which means any premium will be much more modest.”

At press time, the company’s shares were trading at about $1 less than Bain’s bid, seeming to suggest that many investors doubt Callaway will be sold.

Schneider, managing partner of The Parkside Group, a San Bruno, Calif., private-equity firm, acquired control of MacGregor Golf in August 1998. MacGregor’s president, Dana Shertz, is a former vice president of sales at Callaway. Schneider declined via e-mail to comment on his reported bid.

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