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Callaway Golf's Stock Surges; Letter Spells Out Takeover Bid

June 24, 2005|Sallie Hofmeister | Times Staff Writer

Callaway Golf Co. hit the green Thursday with its stock rising 14.5% as investors began betting on a possible takeover of the nation's largest club manufacturer.

Responding to a report in the Los Angeles Times, the Carlsbad, Calif.-based company, known for its line of Big Bertha clubs, said Thursday that it had received "unsolicited indications of interest," although there were no "firm offers" or substantive discussions underway.

However, a May 20 letter to Callaway's board, which was obtained by The Times, suggested that Callaway was indeed in play. The letter from Boston-based buyout firm Thomas H. Lee Partners and Fidelity National Financial Inc. was written to the attention of Callaway Chairman and interim Chief Executive William Baker and leading independent director Ronald Beard.

Its opening sentence states, "We are pleased to submit the following proposal regarding the acquisition of Callaway Golf Corp."

Thomas H. Lee and Fidelity, an insurance and real estate services company, proposed an all-cash purchase price of $15 to $16 a share for Callaway's assets. Based on the company's shares outstanding, that would value the deal at $1.1 billion to $1.2 billion.

According to the letter, the deal could be financed by the two partners alone but would probably involve Wall Street investment bank Bear, Stearns & Co.

Sources close to the suitors said Thursday that Callaway's board probably did not characterize the bid as a firm offer because the letter indicated that a more thorough review of corporate financial data was needed to confirm the suggested bid price.

"We can finish our diligence and be prepared to enter into a definitive agreement within three weeks if given full access to management and information," the letter said.

Bear Stearns and Deutsche Bank Group have agreed to finance about $700 million of the proposed acquisition, sources close to the situation said Thursday. The remaining $500 million would come from Thomas H. Lee and Fidelity, they said.

Many analysts and investors viewed the offering price as generous, given the industrywide slump in golf equipment sales, Callaway's financial losses and the decline in the number of golf rounds played in recent years.

On Thursday, Callaway shares surged $1.97 to $15.55 -- comfortably below the top price in the offering letter. In after-hours trading, shares hit $16. The day before the May 20 letter, the shares closed at $11.89, up from a 2005 low in April of $10.78.

Several analysts said Thursday that they did not expect rival suitors. "We would not chase the stock higher today as we do not anticipate a competitive bid," said a report by JPMorgan Chase & Co.

Analysts said Callaway's board would probably try to delay any takeover until later in the year, when directors expect the company's financial performance to improve. The company said Thursday that it would release its second-quarter earnings ahead of schedule, in early July. Sources said the company was hoping that improvements in the quarter would drive up Callaway's stock price, potentially undermining an unsolicited takeover.

On Thursday, Callaway also confirmed that it was working with New York investment banking firm Lazard Ltd. to explore strategic options.

"We feel that this is an opportune time to explore a full range of strategic alternatives that could enhance shareholder value," said Callaway director Beard in a statement Thursday.

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