Callaway in Play?

With shares of Callaway Golf (ELY ) in the sand trap--after a warning on June 8 that second-quarter results would fall way below forecasts--the top U.S. golf-club maker is attracting some sharks. Callaway's stock is indeed bloodied, dropping in the past week from 25 to 15, before edging up to 16. In 1997, it traded as high as 38.

Here's the scoop: An investor group has approached a major Callaway stakeholder--who owns almost 5%--seeking to buy him out. The group is working with a major European company that wants to acquire the beaten-down Callaway. This group has also approached other big Callaway holders. The investor who holds the 5% block says he isn't sure whether he would sell out or lead a group himself to buy Callaway. He says the value of Callaway could double once its project to license its brand name gains momentum. Callaway is worth 30 to 35 a share to a strategic buyer that would exploit the company's name, he says.

"The stock now trades at a discount to the value of its underlying business," says Joseph Yurman, an analyst at Bear Stearns, who has upped his rating from "attractive" to "buy." He cut his 2001 estimate to $1.14 a share from $1.63, and his 2002 to $1.30 from $1.48, vs. 2000's $1.14.

Callaway makes premium clubs under several brand names, including Big Bertha. A major worry: The U.S. Golf Assn. has banned one Callaway driver, the ERC II. It says the club exceeds the limit for how much spring the face may produce when it hits the ball. Callaway wasn't available for comment.

By Gene G. Marcial

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