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Don't Get Shafted byAldila Takeover Talk

Acting on takeover rumors always bears risk. But in the case of

Aldila

(ALDA:Nasdaq), a golf shaft maker, betting on a takeover could leave investors in the rough.

In the past couple years, chatter on the links that one of the giant club manufacturers like

Callaway Golf

(ELY:NYSE) or privately-held

Taylor-Made

would bid for the company have turned out to be untrue. And according to analysts who follow Aldila, as a stand-alone the company remains several years away from scoring financial gains for its investors.

The latest takeover scenario making the rounds, mentioned by

The San Diego Union-Tribune

on January 21, has

American Brands

(AMB:NYSE) as the suitor. American Brands has built a solid golf franchise, adding club maker

Cobra Golf

to the fold in 1995 for $700 million. Rumors of an American Brands bid intensified earlier this month after Aldila president and chief operating officer, Edmond S. Abrain, moved to Titelist Golf, a unit of American Brands.

After Abrain's departure, Aldila's shares leaped from 4 7/8 on Jan. 14 to 6 on Jan. 22 with unusually high trading volume of 300,000 shares daily, more than triple the average daily turnover. That movement prompted more whispers of takeover. But now the whispers look like little more than soft noise.

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"I would really discount someone like American Brands buying them since that doesn't make any sense," says Robert C. Marvin, an analyst with

The Seidler Companies

who has the stock rated a neutral. The Seidler Companies have not done any underwriting for Aldila.

Marvin adds that if Aldila was acquired by American Brands it would risk losing its biggest customer, Callaway Golf. Since American Brands makes Cobra clubs, a competing brand, Callaway would likely try to find a different shaft maker, analysts say.

Also, American Brands has not found the Cobra acquisition smooth in its aftermath. They "had their lunch handed to them with Cobra and

American Brands owns their own

small graphite shaft plant," says Bud Leedom, editor of

Golf Insight & Investing

, a San Diego-based golf stocks newsletter.

While the company's policy is to decline comment on rumors, Aldila CFO Robert J. Cierzan says that if a "deal was right, the board would have to look at the best interest of shareholders." American Brands did not return phone calls for comment.

Meanwhile, John T. Mahoney, an analyst with

Raymond James

of St. Petersburg, Fla., pooh-poohs the Aldila chatter. He notes that this is the second consecutive year in which the company has become the center of takeover rumors--just ahead of the January PGA Merchandise Show. Adding to that connection, Aldila stock has dropped modestly in the two days following the industry trade show to 5 7/16.

Mahoney believes that while the company has improved its prospects, Aldila does not represent a good buy right now. He rates the company neutral. Raymond James has not done any underwriting work for Aldila.

Aldila continues to recover from a terrible 1995. The company got slammed when customer Callaway, which accounted for 64% of revenue in 1994, decided to diversify its graphite shaft orders and lower its inventories. In 1995, Callaway dropped to 50% of Aldila revenue. The loss knocked overall revenue down to $56 million in 1995, compared with $79 million in 1994. The skid nailed Aldila stock, which dropped 60% in Jan. 1995 to 4 1/2.

Aldila, the biggest dog in the graphite shaft business with about one-third of the market, says it is working hard not only to rebuild revenue momentum, but also to drive down costs. Cierzan, the Aldila CFO, says the push to cut costs stems from the growing competition from privately-held firms like

Unifiber

and

HST

.

In addition, the company is going to start manufacturing the carbon fiber that is used to produce its golf shafts. This will give Aldila another avenue to improve its growth by allowing it to sell the carbon fiber for a variety of other uses.

Still, it will be some time before these moves have a material impact on the company's bottom-line, analysts say. Demand for graphite shafts is only slowly improving and Cierzan says that its carbon fiber plant will not be up and running before the first half of 1998.

Despite the lengthy time horizon, some value investors have hunkered down with a stake in Aldila, hoping that the eventual rebound is surprisingly robust. Charles Perritt, a value investor who owns shares of the stock in his

Perritt Capital Growth

(PRCGX) mutual fund, says he likes Aldila based on its rebound potential as well as the fact that it's trading close to book value. A takeover is "something we're not betting on."

Of course, playing the value game can grow dull, difficult and time-consuming. In the meantime, investors might be better off ignoring any stray Aldila rumors they hear at the nineteenth hole.

By Avi Stieglitz

astieglitz@thestreet.com