On September 4, a United States federal bankruptcy court approved the sale of the assets of Top-Flite Golf Corp. Top-Flite, the former Spalding Sports Worldwide and the first American manufacturer of golf clubs and golf balls, was sold to Callaway Golf Company, currently the worldÕs largest golf club manufacturer.
This puts an end, at least for the foreseeable future, to the independent operations of one of the most famous American manufacturers of sports equipment. In reality, Spalding has changed owners many times before, but the current sale took effect under court supervision to accomplish certain results available only under the United States bankruptcy laws.
That fact is especially interesting because it may show how similar cases may occur in the future, both in the United States and elsewhere. And of course the sale has relevance to all of us who follow the game of golf.
I will explain the legal procedures below, but first let me provide a little background about the company and its history.
A.G. Spalding was a famous baseball pitcher in the 1870Õs who, like others of that period, made his own baseballs. He started his company in 1876, and expanded to golf by importing golf clubs from Scotland around 1893, making clubs in America in 1894 and golf balls in 1895. The golf line became very popular. Indeed, the first golf clubs I ever used were my grandfatherÕs A. G. Spalding & Brothers ÒRobert T. Jones, Jr.Ó model clubs made in the 1930Õs.
Spalding golf balls are now sold under the well-known Top-Flite, Strata and Ben Hogan brands. Top-Flite, as the company has been known recently, has been the second-largest golf ball manufacturer in the United States, behind Acushnet, which makes Titleist and Pinnacle balls. Top-Flite has a huge plant near Springfield, Massachusetts and another in New York State. In addition, the company holds many key patents and has perhaps the lowest-cost production operations in the golf ball industry. At full capacity, it can produce about 30 million dozen golf balls per year. However, in the present economy, industry analysts say that only about 19 million dozen are being produced.
As I said, Spalding has changed owners before. In 1958, Pyramid Rubber Company of Ohio, later known as Evenflo Company, a manufacturer of baby bottles and other infant products, began to acquire shares of A.G. Spalding, Inc., eventually acquiring control. In 1962, Pyramid merged with a company called Dunhill International, and then Dunhill and the AP Parts Corporation, a maker of automobile mufflers, merged under the name Questor Corporation. Dunhill and AP Parts were both owned and run by one of my childhood classmates in Toledo, Ohio, Sandy Goerlich, and her family.
By 1984, control of Spalding Sports Worldwide and Evenflo was acquired by the Cisneros family in Florida and the headquarters of the renamed Spalding & Evenflo Companies, Inc. was moved to Tampa, Florida. In 1996, the company name was changed again, to Spalding Holdings Corporation, with Kohlberg Kravis Roberts & Co. (KKR), a famous private investment firm, taking a majority interest through a recapitalization, and with the Cisneros familyÕs keeping a minority interest. The sporting goods business was set up as a subsidiary, Spalding Sports Worldwide and in 1998 it was separated from the Evenflo business. Throughout this period the company was in practical terms privately owned (with 88 shareholders in 1999) and not listed on any stock exchange. At this point, Spalding was the largest volume producer of, among other times, golf balls, basketballs and soft balls in the United States and carried a full line of sports equipment products. It had $512 million in sales and was a leader in the $2.8 billion wholesale golf industry and in the $60 billion wholesale sporting goods industry. In 1996 it had further expanded its gold business by acquiring EtonicÕs line of products and in 1997, the Ben Hogan line of clubs and other golf products. Thus by 1998, golf products were $394 million of its sales or 77 percent of its business. It was not profitable, however.
During late 1998, KKR
brought in a new management team to improve earnings, cash flow and market
share. The situation seemed at first glance to be looking much better, in that
a prominent 70-year-old businessman and former Chairman and Chief Executive
Officer of Proctor & Gamble Company was named Chairman. He in turn hired a
former Executive Vice President of Kraft, Inc. as President and Chief Executive
Officer, with a mandate to strengthen the marketing department, to reposition
product lines and to improve costs. However, as able as they may have been,
neither had experience in the sporting goods industry.
At the end of 1999, the company sold its remaining interest in Evenflo to a KKR fund.
Unfortunately, sales continued to decline, to $431 million in 2000 and $409 million in 2001, with net losses of $27 million and $20 million, respectively. By 2001, long-term debt was $560 million. And by then there was a shareholders deficiency (negative equity) of $246 million.
By November of that year,
Spalding could no longer pay interest payments due on its senior subordinated
notes and it was proposing to exchange the notes for other securities as part
of a further recapitalization of the company. The seasonal need for cash flow
was using up all its available credit and its attempts to reposition its
product lines in the market, including write-offs and discount sales of
discontinued golf club products, were hurting its brand image.
What happened? Was it bad management? Could it have been poor marketing strategies? Tired brands? Far too much debt? All these could be causes, but in fact often business difficulties are a result of changes in the market or in the economy as a whole. In SpaldingÕs case, it seems clear that an increasingly competitive industry due to new and highly aggressive entrants like Callaway, Nike, Adams, Orlimar and several others, shifts of manufacturing to China and other low cost areas, plus a decline in industry sales in the late 1990Õs, put unbearable pressures on its business and forced it into further radical restructuring.
Conditions got so bad that Spalding sold the Etonic line of golf products, and then in April of this year it took the unusual step of selling all of its non-golf businesses, including all inflatable balls and other sports equipment -- and even the long-famous Spalding brand name -- to a competitor, Russell Athletic Corporation. The remaining company changed its name to The Top-Flite Golf Company, based on the Top-Flite golf balls and clubs, its leading brand in terms of revenues and profits.
However, these efforts were too late. By June 2003, the companyÕs $250 million in sales for 2002 could simply not support its $530 million in debt and the market had, in managementÕs view, become impossibly competitive. The end was in sight. Management looked for a buyer for what remained.
At this point, however, buyers for what had become essentially a failed company were very scarce. No one wanted the debt burden and in order to get any reasonable price for the assets, the company would have to transfer them free of the liabilities.
To accomplish this required Top-Flite, as the company was now named, to declare bankruptcy under Chapter 11 of the United States Bankruptcy Code. However, the legal procedure used was that of what is called a ÒSection 363 Sale.Ó Section 363 enables a debtor to sell property other than in the ordinary course of business with the approval of the Bankruptcy Court and thus to avoid having to file a plan of reorganization and engage in a lengthy recovery process.
In other words, this is a process that permits a seller to sell assets without lengthy negotiations with creditors. In reality, like other Section 363 Sales, the sale was preplanned and agreed with the buyer, which was Callaway. All details were agreed and submitted to the Bankruptcy Court as a Òpre-packagedÓ deal. This has in recent years become a dominant method of selling assets by insolvent debtors.
Naturally, it is common for creditors and other potential buyers to object to a Section 363 Sale on grounds that it is a scheme to strip them of various protections of the Bankruptcy Code. However, assuming that one can meet the test of a sound business purpose, such as the presence of severe cash flow problems and a threat of liquidation that may lead to even worse results for creditors, courts will allow this procedure.
A Section 363 Sale begins with what is called the identification of a Òstalking horseÓ buyer. This means a buyer who takes the lead, possibly encouraging other buyers, but in fact is expecting to conclude the sale itself. Notice is then given to other interested parties, who may wish to bid against the stalking horse buyerÕs commitment, under bidding terms approved by the court. An auction takes place under court supervision to assure that the Òhighest and bestÓ offer for the assets is obtained. That may include factors other than price, such as speed, financing availability, likelihood of regulatory problems, etc. Once chosen by the court, it enters an order to direct the sale that normally says that the buyer takes the assets free of liabilities, and it gets the benefit of assignments of any contracts proposed to be acquired.
It is beyond the scope of this article to discuss other types of bankruptcy proceedings, but it is clear that the Section 363 process is very attractive to both a buyer and to a seller that is trying to save as much as possible of its declining business entity.
Callaway Golf wanted Top-FliteÕs very low-cost golf ball production facilities and Top-FliteÕs brands. It could also gain Top-FliteÕs technology and to stop having to pay patent royalties. Callaway itself had entered the golf ball business in recent years, but it had never made a profit and had limited market share, with a plant having capacity of only six million dozen balls per year. Under the deal negotiated with Top-Flite, it became the stalking horse with a bid of $125 million for the assets, free and clear of debt.
Taylor Made Golf, a subsidiary of Adidas-Salomon AG, quickly offered a competing bid. Nike and Acushnet were other obvious prospective bidders, but neither stepped forward. Acushnet already had such high market share in golf balls that it would have had antitrust regulatory problems in achieving a deal.
By September, after more than 30 bids and counter-bids, Adidas withdrew, and the Bankruptcy Court approved the sale to Callaway for $174.4 million.
One non-price factor may have been that Callaway planned to maintain the Top-Flite factory in Massachusetts, a major local employer with 935 workers. Adidas had made no such commitment.
Some of the Top-Flite brands may decline, but it is most likely that Callaway will preserve them to keep market share. In addition, the Ben Hogan club line is considered to be Òpremium-quality,Ó and reaches a different group of customers compared with CallawayÕs own clubs, which generally have a forgiving, game-improvement reputation. My guess is that Callaway, which is a company with strong marketing skills, will do its best to strengthen all the acquired brands.
That would be good for the industry, for golfers who have wider choice of products and for the legacy of Spalding and of Ben Hogan. The late Ely Callaway is often criticized for making the golf industry too business-oriented. Seldom recognized is that his motherÕs cousin was the immortal Robert T. Jones, Jr., perhaps the most beloved sportsman in golf history. Callaway, himself a fine golfer, took Jones as his personal model.
Copyright © 2003, 2008 Norman R. Solberg