Gibson files for bankruptcy

[ptchristopher3]

No argument Bebob.

It is a difficult situation.

It is not a pant-load to suggest that Gibson handled the dealer relationship to the detriment of both the dealers and themselves.

It is simply not the case that they “fired” dealers. That is not the nature of the relationship they had with these dealers, specifically Dave’s, who were mentioned twice.

[Jazzstdnt]

If you read my post you would notice I was responding to a prior post suggesting rich people would pay more for certain goods. Catering to rich people is the definition of a luxury business. I never said Gibson was exclusively a luxury brand, only that focusing on that segment, as some have suggested, is a losing proposition.

Re' the Gibsons you mentioned, I'm trying to imagine how a Super 400 or LeGrand cannot be considered a "high-end" guitar.

Other than that, I realize they make what they make and charge what they want. That might one reason they're in financial straits and Henry J was complaining about people not wanting to buy his guitars. (Of course his explanation was the guitar stores. Can't have anything to do with competition and prices.)

High end is Montelleone.

Competition for what specifically? Can you list out some specific carved top archtop model A/B comparisons, without the continued generalizations?

[Doctor Jeff]

PTChristopher3 I am trying to get the image of pantload out of my mind...

I shouldn't have used the word "fired"--confusing re' who was at fault. What I should have said is "dropped" or disengaged from. There's a lot of support for the idea that Gibson's approach was to move away from the B&M stores and so they tried to force conditions on them the retailers couldn't live with.

Jazzstdnt sorry I don't have time for a detailed list of A/B comparisons, but here's a brief observation. At Musician's Friend the Gibson Super 400 is $13,000 and Le Grande $14,000. Maybe they're not as much as a Monteleone, but they're a lot of money. Saying a $13,000 guitar is not "high-end" is like saying a BMW 7-series is not a luxury car because it's not as much as a Ferrari.

It's hard to get a handle on what archtops Gibson is currently selling or what they will be offering, given all the changes taking place. One can get an ES-275 for $4400 and Tal Farlow for $5000 at Musicians' Friend right now. Is that high-end or luxury? I guess it depends on your definition. I personally think it's a lot of money. Of course one can always scrimp and save up for an item like that if he has some disposable income.

I think few would argue that Gibson archtops are not priced high relative to competitors. A Peerless Sunset is about $900, and a Godin Jazz is $1900. Now you may argue they're not made in the US or they're not Gibson quality. (By the way, I personally have never said a bad thing about Gibson quality. I've had 2 and they were both perfect in every way.) That may be true, and that may factor into one's decision, but there's no doubt Gibson has been feeling the competition, mostly from Asia, but from Canada as well.

At the risk of beating a dead horse, my point is that Gibson has had a kind of triple strategy in recent years: sell solid-bodies like LP's to enthusiasts; introduce gimmicky technological tricks like the autotuners and Dusk Tiger stuff; and appeal to (mainly) well-healed archtop afficianadoes. I don't diss the LP or Explorer--they're fine for what they do. They are priced higher than a lot of competitors. As far as the tech stuff--well we know how that went over. They seem to be moving out of archtops or at least can't decide what they want to do with it, in terms of dropping models, laying off staff, selling the Memphis plant.

I think a lot of us love Gibson guitars--we just don't understand what the strategy has been the last few years and are concerned about the future with the bankruptcy.

[christianm77]

Archtops are hard to sell and many retailers don’t know what to do with them.

9/10 you go to a music shop and have to try to evaluate some lovely archtop set up with rock and roll strings. That’s obviously for the big retailers, guitar guitar for instance in the UK, but some small shops as well.

I think Gibson made it a condition of being a dealership that retailers carry some archtops? Correct me if I’m wrong.

[ptchristopher3]

PTChristopher3 I am trying to get the image of pantload out of my mind...

I shouldn't have used the word "fired"--confusing re' who was at fault. What I should have said is "dropped" or disengaged from. There's a lot of support for the idea that Gibson's approach was to move away from the B&M stores and so they tried to force conditions on them the retailers couldn't live with.

I definitely understand. But in my view there was no strategy to specifically force dealers away by presenting unacceptable conditions.

This is no small subtlety in the retail picture for Gibson, or Fender, or Dyson vacuums, or Specialized bicycles,...

They need to plan a product line well ahead of the market demand, then depend on a sales channel to move the product line one way or another.

I have seen no information at all that suggests Gibson did not want a given active full-line dealer as part of their overall channel.

I do see ongoing struggles by dealers to keep the mix of excitement, loyalty, personal relationships, sense of entitlement/privilege (awash in hubris), and simple herd thinking, needed to move a luxury product line. This is not helped by the current conditions.

But in my view the guitar market wants a Gibson very very much and will soon enough get back to forgiving all sorts of shortfalls (as we/they have for decades) to keep the brand going.

Interesting stuff.

[Jazzstdnt]

PTChristopher3 I am trying to get the image of pantload out of my mind...

I shouldn't have used the word "fired"--confusing re' who was at fault. What I should have said is "dropped" or disengaged from. There's a lot of support for the idea that Gibson's approach was to move away from the B&M stores and so they tried to force conditions on them the retailers couldn't live with.

Jazzstdnt sorry I don't have time for a detailed list of A/B comparisons, but here's a brief observation. At Musician's Friend the Gibson Super 400 is $13,000 and Le Grande $14,000. Maybe they're not as much as a Monteleone, but they're a lot of money. Saying a $13,000 guitar is not "high-end" is like saying a BMW 7-series is not a luxury car because it's not as much as a Ferrari.

It's hard to get a handle on what archtops Gibson is currently selling or what they will be offering, given all the changes taking place. One can get an ES-275 for $4400 and Tal Farlow for $5000 at Musicians' Friend right now. Is that high-end or luxury? I guess it depends on your definition. I personally think it's a lot of money. Of course one can always scrimp and save up for an item like that if he has some disposable income.

I think few would argue that Gibson archtops are not priced high relative to competitors. A Peerless Sunset is about $900, and a Godin Jazz is $1900. Now you may argue they're not made in the US or they're not Gibson quality. (By the way, I personally have never said a bad thing about Gibson quality. I've had 2 and they were both perfect in every way.) That may be true, and that may factor into one's decision, but there's no doubt Gibson has been feeling the competition, mostly from Asia, but from Canada as well.

At the risk of beating a dead horse, my point is that Gibson has had a kind of triple strategy in recent years: sell solid-bodies like LP's to enthusiasts; introduce gimmicky technological tricks like the autotuners and Dusk Tiger stuff; and appeal to (mainly) well-healed archtop afficianadoes. I don't diss the LP or Explorer--they're fine for what they do. They are priced higher than a lot of competitors. As far as the tech stuff--well we know how that went over. They seem to be moving out of archtops or at least can't decide what they want to do with it, in terms of dropping models, laying off staff, selling the Memphis plant.

I think a lot of us love Gibson guitars--we just don't understand what the strategy has been the last few years and are concerned about the future with the bankruptcy.

Well I can tell that you like the car analogy but I don't think its apt. I would not call those prices high end because (1) you don't buy one online from Musician's Friend if you're smart, (2) you don't pay that price if you're smart, (3) and its a Super 400 in 2018 yada yada.

I would not term them luxury guitars either. I can't sit on them, sleep in them, or eat a gourmet meal in them.

Some people buy bass boats others buy Benedettos. Is a bass boat a high-end luxury?

I didn't get the memo that said that everything besides a house or car must be purchased with disposable cash laying around. If one plans to keep an archtop for 20-30 years, why not pay for it over 2? And why not choose a brand that will be easy to sell when one is ready?

[DRS]

I think you guys are generally chasing each other down the wrong rabbit hole in a couple ways.

First, by all accounts the problem is not a result of underperformance by Gibson guitars. It is a mountain of debt resulting from the purchase of several other companies, mostly bought with borrowed money and most of which continued to lose a lot of money after they were acquired.

Second since Gibson is being acquired, at least for the short term, by Gibson's primary creditors, the new owners are not likely to be motivated by Gibson's long term best interest. Their first concern will most likely be to get back the substantial amount of money they're putting up to allow this deal to move forward plus as much as they can of the money they were already owed before having to pour in good money after bad. I doubt that they have any real ambition to be in the guitar business. They were just really left with no choice so I suspect that they will want to get as much of their money out as quickly as possible and leave it for next owners after them to decide what to do with Gibson for the long term.

Thanks, Jim, for such a concise, and what I believe is accurate, summary.
As we are guitar players, we tend to look at everything through a guitaristic lens. The new owners deal in units and earnings and ROI. It could be guitars. It could be muffler brackets. They don't care. I believe Henry once cared and took a big chance 30+ years ago. But the same pride and drive that let him take a chance so many years ago also made him make poor decisions based on pride and "me too.'

[John A.]

I definitely understand. But in my view there was no strategy to specifically force dealers away by presenting unacceptable conditions.

This is no small subtlety in the retail picture for Gibson, or Fender, or Dyson vacuums, or Specialized bicycles,...

They need to plan a product line well ahead of the market demand, then depend on a sales channel to move the product line one way or another.

I have seen no information at all that suggests Gibson did not want a given active full-line dealer as part of their overall channel.

I do see ongoing struggles by dealers to keep the mix of excitement, loyalty, personal relationships, sense of entitlement/privilege (awash in hubris), and simple herd thinking, needed to move a luxury product line. This is not helped by the current conditions.

But in my view the guitar market wants a Gibson very very much and will soon enough get back to forgiving all sorts of shortfalls (as we/they have for decades) to keep the brand going.

Interesting stuff.

None of us knows whether the intent behind the dealership arrangements Gibson offered was to cull dealers per se, but that was an effect. The effect was predictable. Dealers have not been shy about telling customers why they stopped selling Gibson (two prominent store owners who had both sold new Gibsons for many years told me in extensive detail*, and I'm just some schmuck buying a pack of strings). Connect the dots, or not. Your choice.

John

* large minimum order paid in advance; they had to take both Epiphones and Gibsons; had to certain models of Gibsons that never sold; onerous return conditions; could not sell new product on line. These same dealers sell Fender, Taylor, Martin under much easier terms, in store and online.

[DRS]

. . .



Jim, I agree with the second part. However, as to the first, "by all accounts" the guitar business is doing OK? There are unknowns here that are yet to be uncovered. Bad business practices in one area generally bleed into another.

There are 3 reasons we know of to question that assumption. 1) Gibson selling the Memphis plant and laying off workers. Downsizing is never a sign "things are all right." 2) Henry J complaining in an interview about the need to change focus because they were having trouble selling guitars (posted above). And 3) their crazy decision to cut off long-time vendors and focus mainly on large boxes and the internet.

I hate to keep bringing this up, but to me it's telling. I can't see how firing so many major retailers like Dave's Guitars should make us confident in Gibson's ability to sell their product. I know it pissed a lot of people off, not just the retailers but a lot of their customers. I can't find the sense in it, but if someone has a reasonable explanation I'd give it a listen.

I would like to comment on your 3 points.

As an employee who worked for a company that went bankrupt, one sure sign is when owners make decisions that are based on cash flow not long term profitability. Long term profits can't help you if the bank is locking the doors on Monday.

Henry's troubles began when he wasn't satisfied being an iconic guitar manufacturer but wanted to be one of the big boys selling to all kinds of smart, young people, not just musicians. So he started buying up consumer tech companies. But, unfortunately, companies that were sunset companies. The parts of his company that did generate a profit couldn't pay the obligations of these new companies and the debt. But those bonds are still due. And at a much higher rate than normal bank loans. Henry needed cash.

Selling those plants generated an immediate cash flow boost as payroll is every 2 weeks while those dealers won't pay their invoices for those nice guitars (if they buy at all) for 60+ days.

As far as Gibson's guitar business, I believe Gibson's core line - Les Pauls, SGs, ES 335, J45, Southern Jumbo, and tasteful derivatives, sell well. Epiphones sell well. But Henry wanted to create a "hot product." Like he could sell guitars like iPhones. This is his crazy pride. Henry spewing nonsense is him creating a buzz about his products in a hi-tech world where last years code may as well be the Rosetta stone. He also wanted to sell guitars like Hublot sells watches. Over-priced symbols of conspicuous consumption. Hence all the various levels of "Historic" guitars. He had troubles with "selling" his guitars that were concept turds. He had trouble selling a lot of those $7,000 59 Historic LPs. And when I say sell, that is to dealers. You and I don't send our money to Gibson.

Dealing with dozens and dozens of individual dealers across the USA is a PITA. Some may be good at selling Gibson's line. Some probably aren't. Plus Henry forced them into selling the weird stuff and expensive stuff while 90% of there sales were Epi and < $2000 Gibsons. That's why all those expensive Gibson's sprung up on eBay and Reverb - dealers selling "curbside" to liquidate stock below MAP prices off-book. Chasing AP with these small mom'n'pops and even some larger dealers would have been a drag and doesn't help cash flow. Better to sell at a discount to GC and get 1 big cheque. Mom's'n'Pops were prevented form selling new gear on-line. Deals made between the big boys and Gibson. Big boys like GC would be in a position to choke off small dealer's internet sales as part of their nationwide deal.

I think Gibson's guitar division will succeed if they stick to the core models and build trust back with larger dealers. They may never return to a network of hundreds of dealers across the USA just because of the AP issues. Amazon could be an interesting distribution model.

[christianm77]

I feel this is true. People will always want to buy Les pauls - yes even young people.

OTOH I have some sympathy for the idea of doing something different.

But we can see companies like Duesenberg who have strayed from the Fender/Gibson template and seem to be attractive to dealers. It’s all about pricing I guess.

I might save up to spend $4000+ on an ES 335 but I am I likely to spend that much on something innovative.... $1500? Maybe

[DRS]

I feel this is true. People will always want to buy Les pauls - yes even young people.

OTOH I have some sympathy for the idea of doing something different.

But we can see companies like Duesenberg who have strayed from the Fender/Gibson template and seem to be attractive to dealers. It’s all about pricing I guess.

I might save up to spend $4000+ on an ES 335 but I am I likely to spend that much on something innovative.... $1500? Maybe

a few years ago, my 23 year old daughter saw some Modern Country guy she liked playing a Les Paul. She was pleased I had a Les Paul and told me not to sell it.

[savofenno]

I am very surprised that Gibson is doing so badly. But I guess I am uninformed about it as well. So what is their problem? I always thought they should be like Apple; overcharging customers who are very happy to be overcharged. Are they selling too little guitars? Or are their profit margins too small (which would be surprising since that means they have absurd production costs)?
Or are other areas of the company such a drag?

Henry J was a drag.

[Thumpalumpacus]

I think a lot of us love Gibson guitars--we just don't understand what the strategy has been the last few years and are concerned about the future with the bankruptcy.

Honestly, I'm not sure there has been a strategy in place ... outside of throw it all at the wall and see what sticks. In trying to be all things to all players of all budgets, they've ended up competing with their own Epiphone division in the low end of the market, alienated players with disposable income by forcing gadgetry onto every purchase at one point, and putting out a ridiculous number of limited editions with limited market appeal.

I hope the new owners focus on the basics: building good guitars from good woods, doing what you do best by limiting the number of outlier special editions, and ensuring the highest QC. The reorganization will free up the profits of the guitar divisions to attain these goals.

[Jim Soloway]

The reorganization will free up the profits of the guitar divisions to attain these goals.

It won't really. The new owners are going to be the primary creditors. While the debt will technically be wiped out, it's still on the books of those creditors as money they loaned to Gibson and their focus is logically going to be one getting some of that money back along with the $150 Million that they're having to put up to allow the deal to move forward. I seriously doubt that they're going to want to reinvest money to make Gibson a better company before they've recouped that $150 Million plus some of their other loses.

[icr]

I'd just like a new, well built Les Paul standard. Not some hogwash historic mumbo-jumbo, or a off-shore made beginner's guitar. The closest thing I saw in the last ten years was the 2013 Les Paul Traditional (which I did buy). It is a nice guitar, but I'd not call it top-of-the-line.

[Bach5G]

a few years ago, my 23 year old daughter saw some Modern Country guy she liked playing a Les Paul. She was pleased I had a Les Paul and told me not to sell it.

I tried an LP yesterday and was knocked out. Les Paul Traditional - Japan model. Sounded, played great through a Princeton. Less great through a Deluxe. Still. Nice bit of gear $2100 (CDN).

I’m sure Gibson will not only survive, but flourish. It’ll be smaller, leaner, but still a very strong player in the guitar marketplace. It’ll be owned by Joe B and a bunch of wicked sharp Chinese investors.

[goldenwave77]

Second since Gibson is being acquired, at least for the short term, by Gibson's primary creditors, the new owners are not likely to be motivated by Gibson's long term best interest. Their first concern will most likely be to get back the substantial amount of money they're putting up to allow this deal to move forward plus as much as they can of the money they were already owed before having to pour in good money after bad. I doubt that they have any real ambition to be in the guitar business. They were just really left with no choice so I suspect that they will want to get as much of their money out as quickly as possible and leave it for next owners after them to decide what to do with Gibson for the long term.

This statement assumes its conclusion, i.e. that there is something of sufficient value that can be realized, or sold, in the short term to make this come about.

Almost certainly not the case here. Gibson's tangible assets (plant, equipment, supplies, IP) are worth a small fraction of what was owed.

The result....massive writeoffs of the debt that was extended...probably they lost 70 cents on the dollar of funds lent. Gone forever...poof...blotto. Probably held by institutional investors (insurance companies, mutual funds, private funds, etc.)----result----their portfolio investors saw a hit....but probably the institutional investors were quite diversified....so the individual investor might have lost a penny on the dollar.

The reality----the investors (the new owners) will hire the best talent they can to come in, and work with Henry J. in the transition, and try to reposition the company....and it could prosper in the future. Their best chance is to revive the company, and reposition it for the long term. They really don't have another choice.

I had a client who bought a capacitor mfg. out of bankruptcy for $8M, turned it around, did some good marketing with a big contract to Phillips and the Chinese, and he sold it within 2 yrs. for $17M....nice profit, considering he put up around $2M of his own money, and borrowed the rest initially. This was a big score, and won't happen with Gibson as guitar "consumption" is not going to change dramatically.

Seriously, the interesting part of finance is not lending against realizable asset values (collateral)...anyone can do that ....doesn't take much brains...just decent information and fairly honest borrowers....also its a lower margin kind of finance.

Consider....a new country with great natural resources, the best agriculture in history, an incentivized dynamic population, and pretty much immune to foreign invasion (no need for high military expenditures)wants to build a national coast to coast railroad in the 19th cent. ....that was the US. Problem is, hauling freight couldn't possibly pay for the cost of building the RR....solution?....allow the RR companies "rights of way" and land grant options for real estate along the track line and THEN it becomes feasible...and this is how the transatlantic RR was built. Union Pacific and others got rich with their ancillary holdings....not really carrying freight.

Lots of "hired hand" managers can do great things. In the history of Standard Oil, probably the smartest thing the elder Rockefeller did was to hire, and incentivize really smart guys who ended up doing a lot of the work....Henry Huddleston Rogers and Henry Flagler, just to name two. They all made tons of money.


I still have this image from "The Last Emperor" movie in my mind....the playboy younger ruler of China is doing a nightclub singer imitation in China somewhere in the 1930's ....really since the 1930's, China went through WW II, then the Maoist nightmare, and then finally opened itself up, somewhat, to western influences....I still think Gibson might have some appeal to this, and other Asian markets, and yes, I know they make lots of good guitars....still there is only one Gibson, and only one company that did what they did....the archtop, the electric archtop, the laminated archtop, the semi-hollow guitar, the solid body rock machine, the humbucker, etc.

We shall see.

[Stringswinger]

This statement assumes its conclusion, i.e. that there is something of sufficient value that can be realized, or sold, in the short term to make this come about.

Almost certainly not the case here. Gibson's tangible assets (plant, equipment, supplies, IP) are worth a small fraction of what was owed.

I have read that Gibson, apart from the non guitar businesses, has been doing a billion dollar a year in sales with a net profit exceeding 100 million. If that is correct, the value of Gibson guitars is worth way more than a "small fraction" of the 500 million owed. The tangible assets plus the blue sky equals a significant value. That is why 69 percent of the creditors are on board with this plan. If the goal was to simply liquidate the tangible assets, we would be looking at Chapter 7, not Chapter 11.

This BK could be a way for Henry J. to buy time while finding a new group of investors to refinance the debt (or become equity partners without reducing Henry and Dave to 5% ownership). The automatic stay is a beautiful thing for a debtor who is under the gun. If Henry and Dave can come up with the dough to make all of the creditors whole, I am sure the Court, the trustee and the creditors would all be OK with a dismissal.

Assuming the Chapter 11 goes forward according to the plan, I would bet the goal of the creditors will be to downsize Gibson to maximum profitability in order to sell the company for the highest possible price. If they can increase the current value by doing so, the option to buy 5% that Henry and Dave are getting may be worth more that the 3 million each will receive for staying on for a year.

There is a lot of financial incentive for all involved to work hard to keep Gibson strong. Profit is what motivates those who do great things (for the most part). Anyone who foresees a corporate raider scheme in play here is missing the point. Corporate raiders do well when they can buy a company for less than it's value. These creditors, in order to protect their loans, are paying more than Gibson's value. They have plenty of incentive therefore to grow the business, not strip it.

[Doctor Jeff]

A pretty good article:

How Will Gibson&#39;s Bankruptcy Affect Used Gibson | Reverb News

and another:

We asked musicians why guitar companies like Gibson are struggling and how to revive them - MarketWatch

[goldenwave77]

[QUOTE=Stringswinger;869072[B]]I have read that Gibson, apart from the non guitar businesses, has been doing a billion dollar a year in sales with a net profit exceeding 100 million. If that is correct, the value of Gibson guitars is worth way more than a "small fraction" of the 500 million owed. The tangible assets plus the blue sky equals a significant value. That is why 69 percent of the creditors are on board with this plan. If the goal was to simply liquidate the tangible assets, we would be looking at Chapter 7, not Chapter 11.[/B]


This can't be right. $100 million net profit would translate into something a bit higher on an EBITDA basis...say $130 million...applying a conservative multiplier of say 5X times EBITDA yields enterprise value of $650 Million....and they can't refinance $400 million, or even $500 million?!

Doesn't make sense.... we know that Gibson shopped for financing from many, many sources, and couldn't nail down any of it.

Nobody is talking about liquidation. The new owners take over....Henry is a hired hand for a year...a new guy/gal will be brought in....probably with an equity sweetener, and they'll move on from there.

69% creditor approval is a little hard to read....And there is new money financing of $121 Million from the old creditors (undoubtedly the one's getting all the new equity). Again, DIP (debtor in possession) financing is commonly sought in Ch. 11, as is "exit financing" coming out of the bankruptcy....the fact that the old creditors have to pony up additional money themselves is a real sign of weakness. No 3rd party willing to step up to the financing plate is NOT a good sign.

Whatever Gibson is worth...it is less than the debt owed....otherwise we wouldn't be wiping out the equity: Otherwise, Henry and the other guy could issue new reorg. securities for the value of the claims owed, and STILL retain their 85% ownership, but this is not happening, so we can infer it's not possible.

And the 5% warrants are also a little unclear....are they "one penny" (essentially free warrants, to exercise ?!), or do they have an exercise price?

Not sure how much Henry put up to buy them back in the 80's....whatever he put up is gone now. He made a decent salary for years, and maybe he sold some of his original stake to the other 15% or even to the other fellow...so I don't really feel sorry for him. Still, I'm sure that this is not how he wanted to go out.


(Funny how these things work out: CBS bought the Yankees for $10M in the 60's, and sold them later to Steinbrenner for $5 M...who borrowed most of this stake. The Yankees franchise became worth a LOT when cable franchise revenues became part of the picture, and the Yankees revived, and Steinbrenner made a mint....funny how a shipbuilder (Steinbrenner) saw this and the CBS people missed it. The NY, NJ, CT tri-state has a huge population, and the Yankees are very profitable... I like them due to their tradition, but honestly rooting for them is like rooting for gravity---their big cable revenue stream gives them an unfair advantage, if the truth be told.)

[Greentone]

"Whatever Gibson is worth...it is less than the debt owed....otherwise we wouldn't be wiping out the equity: Otherwise, Henry and the other guy could issue new reorg. securities for the value of the claims owed, and STILL retain their 85% ownership, but this is not happening, so we can infer it's not possible. "

Ah...yep. Otherwise, this makes no sense. Good call.

[Stringswinger]

[QUOTE=goldenwave77;869299]

]I have read that Gibson, apart from the non guitar businesses, has been doing a billion dollar a year in sales with a net profit exceeding 100 million. If that is correct, the value of Gibson guitars is worth way more than a "small fraction" of the 500 million owed. The tangible assets plus the blue sky equals a significant value. That is why 69 percent of the creditors are on board with this plan. If the goal was to simply liquidate the tangible assets, we would be looking at Chapter 7, not Chapter 11.[/B]


This can't be right. $100 million net profit would translate into something a bit higher on an EBITDA basis...say $130 million...applying a conservative multiplier of say 5X times EBITDA yields enterprise value of $650 Million....and they can't refinance $400 million, or even $500 million?!

Doesn't make sense.... we know that Gibson shopped for financing from many, many sources, and couldn't nail down any of it.

EBITDA was 11 million in the last quarter. Assuming that translates to 40 million for the year, it is very possible that taking the non guitar business losses out of the equation, that there was 100 million in profit from the guitar division alone.

My experience with closely held businesses is that they are generally valued at 2-3 times EBITDA, unlike big publicly traded ones. Even if one assumes that Gibson, being as longstanding and iconic in the industry as she is, should be valued like a NYSE company, the value is still less than the debt unless the losing divisions are shed.

For most of us, the 3 million each that Henry and Dave are getting would be enough to live comfortably for the rest of our lives (assuming the taxman doesn't take half), but these guys are high rollers and probably want more. I am betting the 5% option is the sweetener. If the unprofitable divisions can be shed and sales increased, perhaps at some point it will be a 600 million dollar company. That would make the creditors almost whole and give Henry and Dave 15 million each. Perhaps that is the exit strategy these players are all shooting for?

There is no doubt that the enterprise is worth less than the 500 million dollar debt, or Henry and Dave would not be where they are.

[goldenwave77]

Stringswinger, you correctly point out that I mis-valued (in effect) the loss-creating divisions. My bad.


So, yes you're right....they decrease overall value, and $40 M EBITDA might be $100 M if they're jettisoned...and again, I'm not really up to snuff on comparative EBITDA's so maybe a 2-3 multiplier is appropriate.

(It's funny....I worked on so many "reverse public offerings" in the 80's (LBO's), I'm almost conditioned to think that being a public company has a negative value...certainly there are higher legal, acctg. and other costs, but in theory liquidity is worth something. Guess one gets into the whole, "sticking to one's knitting debate" and the whole "being publicly traded, means overemphasis on short-term results", debates. E.g., I did another deal, Eckerd Drugs, where they had an acctg. glitch dealing with automatic scanning systems, that caused the public stock price to dive, and someone came in on a takeover bid, and they ended up doing a defensive LBO....entire thing would have been avoided if they'd been privately held, so their publicly traded status did them in, in a sense. It's an empirical question, as they say.)

[Thumpalumpacus]

It won't really. The new owners are going to be the primary creditors. While the debt will technically be wiped out, it's still on the books of those creditors as money they loaned to Gibson and their focus is logically going to be one getting some of that money back along with the $150 Million that they're having to put up to allow the deal to move forward. I seriously doubt that they're going to want to reinvest money to make Gibson a better company before they've recouped that $150 Million plus some of their other loses.

Certainly. But at the same time, I have no doubt they'll understand they stand a better chance of recouping if they don't suck all the blood out of the body, but rather allow the company to reinvest some to increase their marketability. Given that they'll be in control, they'll have final say over what seems best to reposition the company.

[Thumpalumpacus]

There is a lot of financial incentive for all involved to work hard to keep Gibson strong. Profit is what motivates those who do great things (for the most part). Anyone who foresees a corporate raider scheme in play here is missing the point. Corporate raiders do well when they can buy a company for less than it's value. These creditors, in order to protect their loans, are paying more than Gibson's value. They have plenty of incentive therefore to grow the business, not strip it.

There's also the fact that KKR doesn't have a history of parasitic raiding. Over the decades, their strategy has always seemed to be to return the purchase to profitability so that they can maximize resale value when they decide to get out.