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K2 Thrown Curve by Ball Issue

Sources say bid for Rawlings is dependent on contract with Major League Baseball.

March 14, 2003|Jerry Hirsch | Times Staff Writer

A contract dispute between Major League Baseball and K2 Inc. might be a strike against K2's pending acquisition of the century-old Rawlings Sporting Goods Co.

In a Securities and Exchange Commission filing made public Thursday, K2 said it would not complete the acquisition of Rawlings unless it is able to assume the baseball maker's contracts with "key commercial partners."

In the filing, K2 Chief Executive Richard Heckmann did not name the partners. But Rawlings' most important contract is its agreement to make balls for Major League Baseball. And sources familiar with the issue said that could be the hitch.

People familiar with the talks said MLB was triggering a clause in its contract with Rawlings to renegotiate terms. Los Angeles-based K2 may be balking at that, fearful a new contract could boost the price of its proposed $84-million stock acquisition of Rawlings, those people say. MLB's contracts include a provision that gives it the right to reopen negotiations when a partner is acquired.

However, Howard Smith, a senior vice president with MLB, said both companies had agreed to a renegotiated baseball-supply contract and that the paperwork could be signed in less than a week. He did not disclose the contract's terms.

"I don't see anything holding this up," said Smith, who has directed MLB's negotiations with Heckmann and Rawlings Chief Executive Stephen O'Hara. "There is no issue with price."

Rawlings sells about $100 million a year in baseball equipment, and ball sales are a small portion of total revenue.

Shareholders are set to vote on Rawlings' sale to K2 on March 26, and Heckmann said he is not prepared to let talks drag out.

"We are expecting to close this transaction by the end of this month and we want all the consents before we close," Heckmann said. Executives for Fenton, Mo.-based Rawlings did not return calls seeking comment.

The transfer of agreements, such as the baseball contract, is a key condition of the acquisition accord. Rawlings could be forced to pay K2 a $2.9-million breakup fee if the deal is not completed, according to SEC documents.

Sagging stock prices also could halt the acquisition, which Heckmann saw as the first step in building snowboard and fishing gear maker K2 into a Fortune 500 sporting goods company by acquiring famous brands.

The acquisition agreement says K2 can pull out ahead of this month's shareholders vote if K2's average daily closing share price drops below $8 for 15 consecutive days. K2 said that at a stock price under $8, the ratio in the exchange of K2 shares for Rawlings would not make financial sense.

K2 shares closed at $7.90 Wednesday on the New York Stock Exchange, the first time in recent months they have fallen below $8. They bounced back Thursday to close at $8.13.

K2 made the disclosure that it might not complete the deal after investors started calling with questions Wednesday about the recent decline in its stock price. K2 shares have fallen 13.5% this year.

Rawlings fell 4%, or 35 cents, to close at $7.83 on Nasdaq.

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