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Could Ownership Of Gibson Change?

...a $375 million bond issue Gibson floated four years ago to finance the acquisition of the consumer audio division of Philips NV, the large Dutch conglomerate. With the bonds coming due on August 1, 2018, Gibson’s ability to pay them off or secure refinancing is in doubt. If repayment or refinancing efforts fail, Gibson will also be liable for immediate payment of a $145 million term loan, and may face a trip to bankruptcy court.

With the deadline looming, Juszkiewicz has been selling assets to raise cash, including a factory in Memphis, an unused retail store and warehouse in Nashville, and the Cakewalk software brand, and has expressed confidence in his ability to meet bond holder demands. On February 23 he said that a restructuring effort “will lead to the best financial results the company has seen in history…and the ability to pay back the company’s debt in whole.” Bond holders, citing declining revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA), are skeptical and are pressing for a majority stake in the company in exchange for debt forgiveness. A KKR spokesman said their proposals are being met with “stiff resistance” from Juszkiewicz who, along with partner Dave Berryman, have a controlling ownership interest in Gibson.

Financial agencies have also expressed concerns about Gibson’s ability to refinance its bonds, even predicting a possible Chapter 11 bankruptcy filing. On February 22, Standard & Poor’s reported, “With multiple maturities looming and operating weakness ongoing, we believe Nashville-based Gibson Brands could default on its debt obligations over the next six months.” S&P lowered its rating for Gibson bonds to CCC-minus, from the already very low rating of CCC. S&P says a CCC-minus rating indicates that a default is imminent.

Gibson’s current woes stem from its $135 million acquisition of the Woox Innovation division of Philips in 2014. Woox manufactures a wide range of consumer audio products including Bluetooth and Wi-Fi speakers, soundbars, cordless phones, home theater systems, and headphones. In 2014 Juszkiewicz described the transaction as “the most significant step yet in Gibson Brands’ journey to become the largest music and sound technology company in the world.” Philips management, however, made no secret of the fact that its consumer audio business was struggling. In the five years prior to the Gibson acquisition, revenues had declined from $2.5 billion to $1.5 billion, and operating income had dropped from $180 million to $4.1 million.

Juszkiewicz was undeterred by the deteriorating finances, and said that combining the Philips business with his previous audio acquisitions, which included Stanton DJ gear, Cerwin-Vega speakers, KRK studio monitors, TEAC, and Onkyo consumer electronics, would yield powerful synergies. He forecasted that the combined operations would secure a 50% share of the global audio market within a decade. “We expect to achieve it by being better and faster at adopting technologies as they become available. This is what Gibson, Philips, Onkyo, and TEAC have done for decades,” he said in a 2014 Music Trades interview. Investors were impressed by these ambitious forecasts and eagerly snapped up $225 million worth of Gibson bonds in February 2014. The bonds sold so quickly that the company successfully floated another $150 million bond issue two months later.

Four years later, Juszkiewicz’s projected synergies never materialized. Revenues at the Gibson guitar business remained stable at approximately $300 million annually during the period, but sales of audio products declined steadily, from $1.7 billion in 2014 to $1.0 billion for the fiscal year ended March 31, 2017. The declines have continued with audio revenues totaling just $179 million for the quarter ended December 31, 2017.

Gibson’s financial woes have been widely covered in the business press, with news outlets ranging from Bloomberg to CNN giving prominent placement to the story. The media attention is nothing new for Juszkiewicz, who has sparked controversy throughout his 32 years at the helm of Gibson. He and Berryman acquired the guitar maker for approximately $5.0 million in 1986 at a low ebb in the market when many believd that guitars would soon be replaced by electronic instruments. Juszkiewicz proved conventional wisdom wrong, and by focusing on Gibson’s rich heritage and cultivating relationships with prominent artists like Slash, successfully revived the company. From approximately $8 million in 1987, Gibson revenues advanced to $300 million in 2014. He was not as successful with a string of subsequent acquisitions.

In the mid-1990s, he attempted to revive the faded Slingerland drum and Kramer guitar lines with the strategy that worked so well for Gibson. The brands, however, never reclaimed their former prominence. In 1998 he ventured into the technology sector with the purchase of Opcode Systems, which had developed one of the first software-based recording platforms. Two years later, Opcode abruptly shut down. In 2001, he acquired the assets of the Baldwin Piano & Organ Company from General Electric for approximately $22 million. Baldwin’s U.S. piano factories were later closed and distribution of the product line was transferred to North American Music. A proposal to launch a chain of Gibson-themed restaurants and music venues fizzled in 2002 after two pilot locations in Nashville were closed.

Juszkiewicz ventured overseas in 2003, acquiring Deutsche Wurlitzer, a maker of vending machines and juke boxes. However, online music services curtailed jukebox sales and the business was closed in 2006. 2007 saw the acquisition of the state-owned Dongbei Piano Company in China, with the goal of using its sprawling manufacturing operation to produce Baldwin pianos. Attempts to crack the Chinese piano market had limited success, and the plant was later converted to guitar production. 2007 also saw the acquisition of the Garrison Guitar Company with the intention of using Garrison’s Newfoundland, Canada factory to produce a mid-priced line of Gibson acoustics. The plant was later shuttered.

Juszkiewicz announced a merger with TC Electronics in March of 2008; however, the deal was canceled two months later. In 2011, he launched Gibson Pro Audio with the acquisition of Stanton, KRK, and Cerwin-Vega. 2013 saw the acquisition of Cakewalk Software from Roland Corporation, and a $52 million investment in TEAC Corp. of Japan.

The financial difficulties of Gibson Brands have apparently done little to dim the luster of the Gibson guitar brand. Vintage Gibson guitars continue to fetch lofty prices, and demand for the product at retail remains strong. A longtime competitor commented, “However this plays out, and whoever ends up in control, Gibson will still be an important factor in the guitar market.”

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