Callaways proposed acquisition of Top-Flite, once completed, would see Oaktree Capital Management entirely divested of the former Spalding Sports business it took control of in April 2002. Earlier this year, Oaktree sold the companys Etonic golf shoe division, reportedly for $10 million, and completed the sale of Spalding Sporting Goods group to Russell Corp. for $65 million in May.
Spalding changed its name to Top-Flite Golf Company last month, signaling, we thought, a commitment by Oaktree and company CEO Jim Craigie to make a go of it in the golf business with the Top-Flite, Strata and Ben Hogan brands.
But the move was short-lived as Callaway moved to prop up its own ball business with the $125 million deal announced June 30th.
The acquisition is expected to increase Callaways ball output by about seven million dozen a year, a number that will likely be centered at Top-Flites facility in Chicopee, Massachusetts, possibly spelling the end of ELYs failed attempt at their own plant in Carlsbad.
Callaway will not want to take on any of the ball-makers considerable debt — estimated at close to $600 million — racked up in the KKR leveraged buyout deal in 1996. Top-Flite filed for Chapter 11 protection so they could conduct a Section 363 asset sale that enables Callaway to acquire the company free and clear of virtually all liens, claims and interests.
Top-Flite Golf’s international operations are part of the sale, but are not part of the bankruptcy filing. The deal will be subject to subject to Bankruptcy Court approval and must weigh any other offers that come in as part of the 363 bid process.
And therein lies the potential issue.
This is seen as an all-or-nothing deal for Callaways future in golf ball manufacturing and the Top-Flite opportunity may still be appealing to Nike or adidas TaylorMade unit. Fortune Brands Acushnet Company may see an opportunity to stymie a stronger #2 competitor, but that move is seen as unlikely in the face of potential regulatory hurdles.
Whether ELY closes this deal or not, we see the Carlsbad ball operation at risk. Analysts estimate the company has spent $170 million building the Carlsbad ball factory and from continued operating losses. The ball business has lost about $90 million since 2000.
ELY generated $55 million in revenue from balls in 2002 and had an estimated 5% market share in the category. The combination with the Top-Flite brands would give it roughly 25% of the ball market and a less expensive ball manufacturing operation.
Regarding the future of the Carlsbad ball plant, Callaway CEO Ron Drapeau said it was too early to talk about possible scenarios.
Callaway will take a $70 million charge to “consolidate its golf ball and golf club manufacturing and R&D operations” and “write down equipment we wont need in the consolidation.” The consolidation could also affect the current Hogan club manufacturing facility in Fort Worth.
Top-Flite 2002 sales were estimated at approximately $250 million. Callaway had $792 million in sales in 2002. The consolidated numbers put them in a very exclusive club in the industry.
>>> Consolidation only makes sense if you can squeeze efficiencies out of redundant expenses
>>> Think Nike will let this one go by? TM-aG already has the Maxfli deal in place…
