Gibson Chapter 11: Why It Happened, What It Means
Looming maturities on approximately $500 million in debt forced Gibson Brands to file for chapter 11 bankruptcy protection on May 1. Under a reorganization plan approved by the courts days later, the company has already begun liquidating the consumer electronics business it acquired from Philips in June of 2014 and will focus its resources on its musical instrument business, which includes the Gibson and Epiphone guitar brands, and the KRK and Stanton audio brands. Private equity firms KKR and Silver Lake Partners, which own 69% of the secured bonds, have agreed to provide $135 million in debtor-in-possession financing to fund continuing operation during the bankruptcy proceedings, in exchange for securing ownership of the company. Fees for providing the financing could run 10% of the value of the loan. Gibson is expected to emerge from bankruptcy sometime in the fourth quarter, but there could be delays if the reorganization plan is challenged by other creditors. A creditors’ meeting is scheduled for June 11 in Delaware, where the company is incorporated.
The bankruptcy reorganization plan wipes out the ownership stake of existing Gibson shareholders including CEO Henry Juszkiewicz, who held a 36% stake, and President Dave Berryman, who held a 49% stake. Berryman will be retained for a one-year period at a salary of $3.35 million to aid in a management transition, and Juszkiewicz will receive $2.1 million to provide consulting services for a year. Juszkiewicz will also receive approximately $1.5 million in profits from the sale of TEAC shares held by Gibson brands. Juszkiewicz and Berryman will each also receive warrants to purchase a 2.25% interest in the reorganized company over the next five years.
Court filings indicate that Gibson’s core musical instrument and pro audio businesses are financially viable, in contrast to the struggling consumer electronics division, which operated under the Gibson Innovation banner. In the fourth quarter of 2017, the musical instrument business achieved earnings before interest, taxes, depreciation, and amortization (EBITDA) of $26 million on revenues of $71 million. By contrast, Gibson Innovations had negative EBITDA of $8 million on revenues of $95 million. Gibson branded guitar revenues for the 12 months ended January 31, 2018 were $122 million, a 10% increase over the $110 million for the same period a year ago. Gibson reportedly sold 170,000 guitars in 80 countries over the past 12 months.
Gibson’s consumer electronics business began struggling financially almost immediately after the acquisition. As sales of headphones, Bluetooth speakers, and electronics accessories declined in 2015, Gibson delayed a royalty payment of €23.5 million ($25.6) due to Philips, which led rating agencies S&P and Moody’s to downgrade company bonds to “distressed” levels. Concerns increased over the next two years as a succession of chief financial officers abruptly resigned, and Gibson violated numerous loan covenants and had difficulty producing financial statements on a timely basis. In early 2017, an analyst from the publication Debtwire commented, “It was never a question of whether Gibson would file, just when.”
Venders reacted to Gibson’s precarious finances by reducing credit lines by over $100 million, limiting its ability to secure inventory. The resulting cash crunch made it impossible to pay the steep costs associated with laying off legacy Philips employees in Asia, Europe, and Latin America. Brian Fox, a partner with the law firm Alvarez & Marshall, who serves as chief restructuring officer, explained, “The company was trapped in a vicious cycle where it lacked the liquidity to buy inventory and drive sales, while at the same time it lacked the liquidity to rationalize its workforce to match its diminished operations.”
As the financial slide continued, in late 2016, Gibson retained investment banker Jefferies Group LLC to develop a reorganization plan. Jefferies contacted 57 potential financial and strategic entities about participating in either a sale or recapitalization of the company, but was unable to put a transaction together. In a court filing, Fox explained, “Financiers who reviewed the company saw the Gibson brand as strong and a great opportunity in the m.i. business. But, the challenges of the Gibson Innovation business were too great to commit to a refinancing of the entire company.”
Juszkiewicz said of the recently approved reorganization plan, “This process will be virtually invisible to customers, all of whom can continue to rely on Gibson to provide unparalleled products and customer service. Over the past 12 months, we have made substantial strides through an operational restructuring. We have sold non-core brands, increased earnings, and reduced working capital demands. The decision to re-focus on our core business, musical instruments, combined with the significant support from our noteholders, we believe will ensure the company’s long-term stability and financial health.”
Healthy Guitar Business
Gibson’s bankruptcy filing has little to do with its illustrious guitar business and is entirely the result of the $135 million acquisition of the Woox Innovation division of Philips. Days after closing on the deal, 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.” Previously, though, Philips management had made no secret of the declining fortunes of its consumer audio business. 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 sagging 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, the company successfully floated another $150 million bond issue two months later.
Juszkiewicz’s projected synergies never materialized. Revenues at the Gibson guitar business remained stable at approximately $280 million annually, but sales of audio products declined steadily, from $1.7 billion in 2014 to under $800 million for the fiscal year ended March 31, 2017. The declines have continued with audio revenues totaling just $95 million for the quarter ended December 31, 2017.
Gibson’s bankruptcy filing has been widely covered in the global business press, with news outlets ranging from Bloomberg to CNN to The Financial Times Of London giving prominent placement to the story. 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 the prevailing wisdom was that guitars would soon be replaced by electronic instruments. By focusing on Gibson’s rich heritage and cultivating relationships with prominent artists like Slash, Juszkiewicz proved conventional wisdom wrong and orchestrated a dramatic turnaround. 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, Juszkiewicz 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 was curtailed in 2002 after two pilot locations in Nashville were closed.
Juszkiewicz ventured overseas in 2003, acquiring Deutsche Wurlitzer, a maker of vending machines and jukeboxes. 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.