The battle that has been brewing for more than year finally came to a head on Jan. 26 at Bally Total Fitness' annual shareholders meeting in Chicago where three board candidates nominated by a dissident hedge fund were voted in. Meanwhile, a measure to fire company CEO Paul Toback fell short of the needed 75 percent, although it did get a majority of the votes, demonstrating what one fund's leader called "a no-confidence vote." Nevertheless, after the deeds were done, all parties called for peace.
Close to 70 percent of shareholders voted in favor of three directors -- Charles Burdick, Barry Elson and Don Kornstein -- who were proposed by Pardus Capital Partners, one of Bally's majority shareholder funds which has been a vocal dissident. Bally's current audit committee chairman, Eric Langshur, will lose his seat. Although Toback took a beating in the voting, the measure to kick him out of the CEO seat didn't garner the needed percent for passage. A management proposal to authorize stock-grant incentives for management also failed.
The results are a demonstration of the influence large shareholders can have when they join forces, corporate governance experts said. Together, Pardus and Liberation Investment Group -- Bally's second largest shareholder -- own 25 percent of Bally's shares (NYSE: BFT). Although the company's third largest investor with 9 percent, Mark Wattles of Las Vegas, said he joined the two hedge funds in voting for the dissident directors, he did not agree with Toback's ouster.
"It is clear to me that at a minimum a foundation is being laid by current management for a successful turnaround of this company," Wattles said in a letter to Toback in which he was supportive of management's turnaround efforts in operating its worldwide networks of fitness clubs.Â
Emanuel Pearlman, Liberation's director, had led the sometimes vociferous and often contentious charge to boot Toback. Although the initiative fell short of the 75 percent needed, it garnered a significant number of votes -- more than 50 percent of the outstanding shares. "It's a resounding message to the company and to the board," Pearlman said. "It's a no-confidence vote."
Of that vote percentage, however, more than 25 percent was held collectively by Liberation and Pardus, Toback countered. "I'd like to look at the 75 percent of people who didn't have an agenda," he added. "They want us back."
John Rogers Jr., Bally's lead director, said the company continues to have unanimous support for Toback and his management team, saying they have "worked tirelessly to correct the mistakes of the past."
"While a number of forces and agendas appear to have been at work, it is clear from today's vote that Bally's investors intended to send a strong message about the importance of board leadership at the company," Rogers said in a statement.
"We hear that message, and welcome our three new independent directors to constructively work with Bally's independent board and management in helping lead the company's operational turnaround and strategic alternative process to deliver enhanced value for shareholders."
With the directors decided and Toback's fate for now known, the annual meeting -- attended by more than 120 stockholders and other interested parties -- was reportedly less contentious than the months of bickering preceding it suggested.
"There is enough fighting," said Pardus President Karim Samii, who added that he'd spent hours writing an angry speech for the meeting but decided against reading it. "Even though we've been sued and harassed (by management), the time has come for peace."
Crain's Chicago Business reported that the packed-in crowd of about 120 people even joined in a chorus of laughter after one shareholder questioned the trim Toback on why some members of his heath club management team were overweight. Toback responded to that question by ordering Chief Operating Officer John Wildman to stand and show off his physique, adding that Wildman would be "available for arm wrestling after the meeting."
"Like a lot of Americans, I don't think all of us are doing everything we can to stay in shape," Toback was quoted in the Crain article. "That (problem) is why we're in business."
With the proxy fights and annual meeting behind them, attention now turns to the company's sale and turnaround.
"It's time for the company to put this behind it and run their (sale) process," Pearlman, said. "If the special committee does its job correctly, we won't be here next year."
Wattles agreed, saying, "It should be sold, and it should be sold for substantially more than the current stock price."
Shareholders said they would be satisfied with a transaction that priced the company comparably to other large health club chains, such as 24 Hour Fitness USA, Life Time Fitness and Equinox Fitness, which have fetched between 10 times and 14 times their annual earnings before interest, taxes, depreciation and amortization.
Toback said he didn't feel bound by those multiples. "We're a different case," he said. "Bally has a stronger brand than any other (health club) company. On the other hand, it has a lot of debt. Our intention is to run a fair process without any bias involving smart people with money. Arbitrary benchmarks like that are shortsighted, I think."
But with only nine months of disclosed 2005 results -- which showed a $1.8 million profit versus a $13.3 million loss in the year-earlier period -- attempts to value Bally at those multiples would be difficult, reports said.
Toback added that Bally is still several weeks away from offering documents into the market, meaning any transaction likely remains many months away.
Final results of the vote tabulation by IVS Associates, the independent inspectors of election, are anticipated shortly.