Golf Equipments Big Five Becomes Big Four

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And then there were four.
 
In the biggest seismic shift yet in the golf equipment industry, Top-Flite Golf will likely be sold to competitor Callaway Golf. The consolidation will leave four companies ' Acushnet Co. (Titleist, FootJoy and Cobra), Ping, TaylorMade-adidas Golf, and the new Callaway-Top-Flite combination ' in a premium equipment arena that once had room for five.
 
To make the deal work, Top-Flite will declare bankruptcy under Chapter 11 of the Bankruptcy Code, which is reserved for companies that want to reorganize their debt and emerge as going concerns. But under a special provision of that law, designed to save companies that could not, in the courts judgment, make a go of it even when released from debt, the bankrupt company can come to court with a ready buyer. An approved sale seals a prepackaged deal that maintains the declaring company and gives the buyer a debt-free acquisition.
 
The prepackaged Section 363 bankruptcy requires a public auction, at which Callaway could be outbid. The transaction could take 70 to 90 days to conclude.
 
But assuming Callaway will succeed, it will pay about $125 million for substantially all the assets of Top-Flite Golf, the company that remained after Spalding Sports Worldwides non-golf assets were sold to Russell Athletics in May. (Etonic, Spaldings golf shoe division, had already been sold to a private group earlier in the spring.) Callaway will get the Strata ball brand, the Top-Flite club and ball brands, and the Ben Hogan club and ball brands, as well as golf ball plants in Chicopee, Mass. and Gloversville, N.Y., and the Hogan club facility in Fort Worth, Texas.
 
Also in the package would be the Ben Hogan club brands relationship with Chicago-area putter maker Bob Bettinardi. Jim Furyk used a Ben Hogan By Bettinardi putter to win the 2003 U.S. Open.
 
Those golf ball plants represent annual capacity of about 30 million, but current production is at about 19 million per year. Callaways five-year-old golf ball operation, which is troubled with profitability problems, says Callaway CEO Ron Drapeau, has annual capacity of about 6 million dozen per year, but is producing at an annual rate of about 2 million dozen balls now.
 
What Callaway wont get is Top-Flites crushing $530 million debt load. Top-Flites annual sales are about $250 million. If sales of Top-Flite products stay stable, that amount goes to Callaways top line ' and the loss from Callaways golf ball operations (said to be about $20 million per year) and Top-Flites annual interest payments (said to be $50 million per year) both go away.
 
Consumers will notice little, if any, change in the short term. Callaway officials confirm that they plan to run Top-Flites brands as they are now. Neither Callaway nor Top-Flite, which will continue to run the company pending court approval of the sale, would comment on long-term possibilities for the brands.
 
The effect on the competitive environment is, so far, no more than speculation. Titleist long ago seemed to stop fearing Top-Flite golf ball brands, turning its attention to new entrant Nike and threats from a rejuvenated Precept. Bad weather over successive springs and flagging interest in the game has injured companies across the board, but those in cash-poor and/or debt-heavy positions got clobbered hardest. Spalding, and then Top-Flite, struggled to keep up with the competition due to debts that mounted after a reorganization in 1996. Meanwhile, Titleists success with the Pro V1 line solidified its position as the premium golf ball market leader.
 
In golf clubs, Spalding essentially stopped competing for the same customer as Callaway, Ping and TaylorMade-adidas, although it maintained its Top-Flite club line. In recent years, Spalding acquired the Ben Hogan brand and began a campaign to attract the better-player and serious-golfer market share it temporarily ceded to competitors. Furyk was using Hogan irons in his Open win, and other prominent players have signed on to endorse Hogan, one of the games most enduring brands.
 
The Top-Flite brand package gives Callaway a number of options for dovetailing new offerings into its current line. If Callaway indeed intends to leave the brands as they are, the Hogan line could instantly occupy a premium, better-player spot in both balls and clubs, leaving current Callaway balls and clubs to cover the serious, but more game-improvement-minded, customer. The Top-Flite ball brands, Top-Flite XL and the new Infinity, may clash with Callaways current mid-market ball products, but with the experienced brand management at Callaway, there are likely ways around this so that the channels dont overlap or cannibalize each other significantly.
 
The Top-Flite club brand could give Callaway a foothold in a slightly upscale value-priced market. The puzzling piece will be the Bettinardi putters, which at this moment compete directly with Callaways phenomenally successful Odyssey 2-Ball models for the business of the putting enthusiast.
 
But the most compelling effect on competition may be the reduction of it. Just as TaylorMade-adidas essentially neutralized Maxfli as a competitor by buying it, so may the Callaway purchase do the same for this latest buyer ' and the rest of the industry.
 
Will Callaway become a more formidable competitor by bulking up? No matter what you believe about the financials, there can be no guarantee that long-term market share will follow the consolidation. Sources say Titleist is unafraid of the brands that havent been troubling it lately, no matter who the owner. And TaylorMade-adidas, always looking for a new angle in its ongoing battle with across-the-business-park Carlsbad rival Callaway, is said to be considering bidding at the court-ordered auction that must accompany the proposed Callaway purchase, if only to play a little competitive poker.
 
Still, Callaways marketing and brand management experience should not be underestimated ' nor should its resolve; from the days of its founder, the late Ely Callaway, the company has a history of doing what it promises and only promising what it is sure it can do. With a broader position in the premium market, the new Callaway may not dislodge Titleist as the ball leader, for example ' but it may become, with Top-Flite, a very strong second, the kind of competitor that robs sleep from Titleist execs.
 
As usual ' stay tuned.