How bad have things gotten for the management at struggling Bally Total Fitness? The company not only reportedly paid off its debtors big bucks to gain extensions on its reporting timeline, and faced an ongoing SEC investigation, now it's facing some stinging media coverage.
Online investment and information company The Motley Fool (www.fool.com) has just published a multi-part column titled "Bally Totally Unfit," detailing the many foibles of the company (often chronicled here at SNEWSÂ®) since its IPO. Columnist Lawrence Rogers went so far as calling some of the moves "meat headed foolishness."
Adding insult to injury -- or in this case potential injury to insult -- Pardus Capital Management L.P. has recently gobbled up 13 percent of the company's outstanding stock, putting it slightly ahead of Liberation Investment Group (which has had a less than congenial relationship with Bally's management group) as Bally's largest stockholder.
In fact, Liberation filed a lawsuit against Bally on Sept. 16 requesting an order for the company to hold an annual shareholders meeting, where it would also like the company to choose four new board members and "other relief deemed appropriate by the court," in papers filed in Delaware. The company responded on Sept. 19 saying that it expects to complete its multi-year audit and file its financial statements by Nov. 30, 2005, and hold a shareholder's meeting in mid to late January 2006. We're not quite sure what Liberation's response will be to the announcement or how it impacts its other relief, but it shouldn't take long to hear from it.
"The rise in the stock price at Bally recently comes from buying primarily from one group, Pardus Capital. Couple that with the (Chairman and CEO Emanuel R.) Pearlman lawsuit of last Friday suing Bally management, and it has all the trappings of a hostile takeover situation," industry consultant Michael Scott Scudder told SNEWSÂ®. "What seems apparent is that Bally will make it through -- whether it's a reorganization bankruptcy or whatever -- but it is very likely that it will be entirely new management in the near future."
To help alleviate some of its financial burden, primarily $175 million term loan component of Bally's senior secured credit facility, Bally has entered into an agreement to sell its Crunch Fitness division for $45 million in cash to Marc Tascher, a leading entrepreneur and club industry veteran, in partnership with the private equity group of Angelo, Gordon & Co., an alternative asset investment management firm with approximately $9 billion in capital under management.
While taking a chunk out of the term loan component, several industry insiders wondered if the high-profile brand was undervalued in the sale, considering that in addition to the valuable name, the clubs being sold include all of Bally's 21 Crunch locations (located in New York, Chicago, Los Angeles, Atlanta, Miami and San Francisco), as well as Bally's two Gorilla Sports clubs in San Francisco and two of Bally's Pinnacle Fitness clubs in San Francisco. The transaction is subject to customary closing conditions and is expected to close by the end of the fourth quarter of 2005.
But Bally Chairman and CEO Paul Toback said in a release that the move reflects the company's new direction and will aid in its turn-around.
"Although Crunch is a prestigious brand with great potential, its high-end positioning is not consistent with our core strategy, which emphasizes strategic growth of the Bally brand and heavily focuses on the middle-market demographic," said Toback. "When Bally acquired Crunch, our company was focused on acquisitions as the way to drive growth. While Bally added value, capital and new clubs to Crunch during our period of ownership, Crunch now needs a partner willing to commit growth capital to allow it to achieve its full potential. Our capital needs to be directed toward the Bally branded clubs and debt reduction."
SNEWSÂ® View: Wow, that is one tangled web over at Bally's headquarters and we'll have more to report as it shakes out. For now, though, it seems that Bally is throwing whatever it can against the wall to see what sticks to improve matters. We're also sure that if it throws enough, enough will stick -- we're just not sure who will be on the management team when things get righted. It seems that the deck is stacked against Toback and the current management team, while the new Crunch team has gotten a great brand and some impressive facilities at a rock-bottom price.