Conference marathon allows Bally and Liberation to each air views

As the proxy cards continue to come in and Thursday's shareholder meeting approaches, Bally Total Fitness (NYSE: BFT) and Liberation Investment Group, one of two hedge funds at odds with the health club operator, had a chance to express their views on Jan. 20 in conference calls hosted by proxy advisor Glass, Lewis & Co.

As the proxy cards continue to come in and Thursday's shareholder meeting approaches, Bally Total Fitness (NYSE: BFT) and Liberation Investment Group, one of two hedge funds at odds with the health club operator, had a chance to express their views on Jan. 20 in conference calls hosted by proxy advisor Glass, Lewis & Co.

In back-to-back two-hour calls, Glass Lewis President Kevin Cameron questioned the companies while investors listened and submitted queries via email. Glass Lewis after the call reported its recommendation that shareholders vote in favor of key Bally proposals including a compensation plan and a slate of directors, while also recommending voters reject Liberation's proposals. Two other proxy advisers have already made recommendations to their clients: Institutional Shareholder Services did not support Liberation's call to allow shareholders to oust Toback. The proxy adviser reasoned that shareholders should push for governance changes through the board, not directly with executive officers. And Proxy Governance also didn't support Liberation's CEO proposal. However, both Proxy Governance and ISS supported some proposals made by Pardus, but opposed by Bally.

In the first call, Liberation's General Manager Emanuel Pearlman and Nicole Jacoby, its director of research, first fielded questions from Glass Lewis about its solicitation. Liberation holds 11.2 percent in Bally stock -- its second largest shareholder -- and is looking to amend Bally's by-laws giving shareholders the authority to remove the company's CEO, as well as to amend the company's bylaws to increase stockholder authority with respect to director tenure and the removal of officers of the company.

In the second call, Bally's Chairman and CEO Paul Toback and Bally Director Adam Metz talked about the company's performance, its capital structure and proposed board nominees.

Pardus Capital Management, Bally's largest shareholder with 14 percent, declined Glass Lewis' invitation to participate.

In its call, Liberation slammed Bally's management for a lack of transparency and raised doubts about the validity of its operational turnaround. Pearlman stressed that the company needed to improve its corporate governance and change its management, especially since it is seeking strategic alternatives including a possible sale of the company.

"Capital markets have lost confidence in Bally's management team," said Pearlman. "A company with this much leverage needs to have confidence in order to move forward." Pearlman blamed the current management, led by Toback, for a lack of transparency.

Pearlman agreed that the company seems to be doing better, but added that Bally has recently changed the way it accounts for membership revenue. He said it can now stretch out the recognition of revenue over a longer period of time.

"We are still confused as to whether or not the better (performance) is real or has to do with the fact that the accounting changed," Pearlman said. "Even though (Bally) re-filed their financials, they haven't made it clear exactly how they're recognizing revenues." He said it was possible that revenues booked years ago could be showing up now.

Glass Lewis asked Pearlman to comment on Bally's claim that "You have an irrational hatred of the current CEO." Pearlman responded, "I really don't hate him personally. I just don't agree with what he's done. Unfortunately, they've turned it into something personal."

In Bally's subsequent teleconference, Toback said Liberation had no vision of how to improve Bally. "They have no operating expertise and have no plans to turn around Bally."

This was an overriding theme between Bally and Liberation in public statements earlier in the week. Bally said that Liberation and Pardus were "once again missing the key points in their communications" and ignoring the company's success in turning around Bally's business and reducing debt. Bally's Toback released an open letter to shareholders on Jan. 19 elaborating on his management regime's work, as well as urging shareholders to vote in support of Bally's board and management team. In a Reuters article, Pearlman accused the "company's public relations machine" with trying to "divert the focus away from the need for real change at Bally." He added that shareholders should be able to vote on Toback's record to show what they think of his leadership.

Bally also said in the Glass Lewis call that Liberation keeps blaming his team for the sins of the company's former management, adding that the current management is on the right path to turning the company around.

"None of us should be deluded into thinking it's all done, or that it is or has been easy," Toback said during the call. "But we're well on our way, and the results are showing."

Toback noted a number of positive financial metrics and operating statistics, including increases in revenue, operating income before charges, the number of new joining members and the average amount of revenue per member.

Other factors discussed during the Glass Lewis calls were sales of large blocks of stock by Toback and other executives, the election of new directors, and the sale of Bally's high-end chain Crunch Fitness for a fraction of its buying price.

Following the conference calls, Crain's Chicago Business reported that people familiar with the situation are saying Liberation's efforts to oust Toback by proxy appear to be falling short, but the hedge funds haranguing the executive still appear poised to gain greater sway over the company's board.

People close to the company say the "fire Toback" measure being pushed by Liberation Investment is expected to fall below the 75 percent needed for passage, judging by early returns, Crain's reported. But a proposed slate of three new directors put forth by Pardus appears headed for passage.

If the early projections hold (slightly more than 50 percent were in as of Jan. 20), Toback could be weakened as he seeks to turn around and sell the company, Crain's noted. It quoted Toback as saying of his adversaries' plans: "That's the idea. They're trying to get control of this company any way they can."

Also, Toback told Crain's that Bally is putting finishing touches on offering documents, and that any deal is likely several months away. He did not say how many parties have expressed interest and did not offer any clues to their identities, but speculation has centered on buyout firms, which have shown interest in the health club business lately.

Crain's added that auction bidders that lost out on 24 Hour Fitness USA (reportedly Kohlberg Kravis Roberts & Co., Bain & Co. and Hellman & Friedman LLC) could now be interested in Bally. Other potential bidders include New York's Wellspring Capital Management, which held talks with Bally last fall, and hedge fund operator Mark Wattles, Bally's third-largest shareholder.

Bally's shareholders will vote on proposals from Bally, Liberation and Pardus on Jan. 26 at the company's shareholder meeting in Rosemont, Ill.


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