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Turning The Tables At Bally


The Corporation

TURNING THE TABLES AT BALLY

The corporate makeover is inching ahead, but it's not a sure thing

Arthur M. Goldberg has had plenty to worry about since seizing control of Bally Manufacturing Corp. in late 1990. But the other day, as he and four other executives stood by the edge of a pool in one of Bally's Chicago health clubs, he had only one concern: checking out a promising new waterborne exercise machine. As the inventor bobbed, his legs furiously working the prototype contraption and splashing water onto the business-suited executives, Goldberg couldn't contain his enthusiasm: "I can envision these things lined up in a row of 20, each in a different color," he gushed. "Wouldn't it make a spectacular attraction?"

Bally hasn't had much in the way of spectacular lately. When Goldberg ousted longtime Chairman Robert E. Mullane in October, 1990, he inherited an unsteady enterprise groaning under $1.9 billion in debt, a bloated cost structure, and an uncertain strategy. Over the past 20 months, however, Goldberg has unknotted some of Bally's most vexing problems. And he has quietly put the company in a position to capitalize on the nationwide surge in gaming and on the continuing health craze. Both major operating units--two New Jersey casinos and 313 health clubs--turned around in the first quarter after operating losses in five of the previous six (chart).

Goldberg, 50, is compensated handsomely for his efforts--$2.95 million last year, plus a $1 million annuity. But the rehabilitation has begun to turn heads on Wall Street. Bally's bonds are still rated far below investment grade, but securities that once traded as low as 8c on the dollar are now at or near full value. The Chicago company's stock, which bottomed at 1 3/4 in January, 1991, now trades at around 5.

Bally is still a long way from a sure bet, though. Since Goldberg seized control, the company hasn't made any bond payments. That has caused delinquencies totaling $110 million, prompting one bondholder group to push Bally's two Nevada casinos into bankruptcy late last year. In mid-May, BUSINESS WEEK has learned, a group of preferred shareholders threatened to exercise its right to install two representatives on Bally's board because of the defaults. Although Goldberg has retired $760 million of debt, Bally still owes $1.14 billion--a harrowing 74% of capital. Last year, interest expenses helped Bally post an operating loss of $58 million on revenues of $1.4 billion.

DECK SHUFFLER. Bally's troubles are the product of an era--the debt-crazed 1980s--and Robert Mullane. Famous as a free spender, Mullane counted among his friends New York promoter Steven A. Greenberg, now alleged to have illegally passed along secrets about Bally stock he obtained while working as a consultant to the company. Mullane, who has not been implicated in the alleged insider-trading scheme, did not respond to requests for comment. Among his biggest acquisitions were the two Nevada casinos, for which Bally paid $440 million in 1986. Three years later, it paid $730 million for Atlantic City's Golden Nugget casino, in part to keep hostile suitor Donald Trump at bay. The casinos were sound, but Bally couldn't handle so much debt, and by 1990, it was deep in the red.

In stepped Goldberg, a Somerset (N.J.) investor who took over his father's trucking company, Transco Group Inc., at the age of 26. He sold it two years later and embarked on a career as an investor, buying into industrial companies such as Triangle Industries and International Controls Corp., running them briefly, then moving on.

At Goldberg's first Bally board meeting, the 5.4% owner promptly ousted Mullane. Immediately afterward, he suspended debt payments and quickly sold off two equipment units, raising $69.5 million of much needed cash. The money went to retire $180 million of bonds at just 40c on the dollar. He restructured Bally's tapped-out revolving credit lines of $485 million, pledging New Jersey's Park Place casino as collateral. And on June 16, he asked bondholders and preferred shareholders to take Bally stock instead of $37 million in interest and dividend payments. Says Jay H. Lustig, vice-president of Drake Capital Securities Inc., a major holder of Bally's bonds and preferred stock: "These people could teach a course in corporate restructuring."

Goldberg has shuffled the deck at Bally's subsidiary operations, too. When bids for slot-machine maker Bally Gaming International came in well below Bally's $80 million asking price, Goldberg sold a third of the company in an initial public offering last November, raising $38 million. An additional 30% of Gaming is scheduled for sale soon, even though the share price has fallen 49% in recent weeks. Goldberg also recently struck a deal to sell Bally's Reno casino to Hilton Hotels Corp. for $83 million.

A marathon runner who recently began lifting weights, Goldberg has done some heavy pressing at Bally Health & Tennis Corp., which accounts for around half of Bally's revenues. He has closed several unprofitable clubs and trimmed back on a risky expansion. He has also got a handle on troublesome unpaid receivables, and he instituted a new sales commission structure based on revenues, not memberships booked.

For all the changes, the board of directors is essentially the same one that let Mullane's team nearly run Bally aground. Some preferred shareholders say they may push for a special meeting later this year to elect two new board members. For now, some directors have financial ties to Bally. The law firm of director George N. Aronoff, for instance, billed Bally for $3.1 million last year.

BIG IDEAS. Goldberg, once a harsh critic of Bally's salaries and perks, bristles at criticism of his own pay. By arranging debt repurchases with his Wall Street contacts, he argues, he has saved Bally more than twice his paycheck. Besides, he says, look at the results: "There's no one who can argue the facts and merits of what we've done."

Goldberg isn't even close to finished with his plans for Bally. Sometime next year, he may launch a real estate investment trust to buy more health clubs and lease them back to Bally. Goldberg hopes to kick off a new, standardized training system for health club operations, modeled after McDonald's Corp.'s Hamburger University. On the casino side, Bally is trying to sell its management services to new casinos planned by various groups nationwide. The company is also bidding to take part in the megacasino project due to be built in New Orleans.

Those may sound like Mullane-size ambitions. But the bankers who have been essential in financing Bally's corporate makeover seem sanguine about Goldberg, who they claim is more cautious than his predecessor. "Is he going to get overextended and get Bally back into trouble?" says one of the company's lead bankers. "No. It ain't going to happen." Considering the way Bally has treated its bondholders, he had better hope not.David Greising in Chicago


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