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Old 07-27-2012, 01:20 PM
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Lightbulb Fender IPO, GC Risk, Bain, past connections on top!

Why Fender pulled its IPO

July 20, 2012: 3:07 PM ET
Guitar manufacturer Fender cancelled its IPO after its stock was deemed overvalued by some investors.

By Omar Akhtar
FORTUNE -- Rock'n'roll preserved a little bit of independence after Fender reversed its plans to go public, citing poor market conditions.
On Friday morning, Fender CEO Larry Thomas said in a statement that "current market conditions and concerns about economic conditions in Europe do not support completing an initial public offering at what we believe to be an appropriate valuation at this time."
The legendary guitar maker, whose iconic Stratocasters and Telecasters have long been associated with rock royalty such as Eric Clapton and Jimi Hendrix, filed for an initial public offering in March. The offer, set at 10.7 million shares at $13 to $15 a share, was expected to raise about $150 million for the company and its biggest shareholder, San Francisco-based private equity firm Weston Presidio.
In its SEC filing, Fender said it planned to use its share of the proceeds – almost $90 million – to pay down a chunk of its $257 million debt. Moody's Investors Service had welcomed the move, rating Fender's IPO plans as "credit positive," in a March report. But a large debt load and a poor industry outlook may have spooked investors, forcing the company to rethink its plans.
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Jeffrey Bronchick, the chief investment officer at investment advisory firm Cove Street Capital, says the stock was overvalued. "It is a much more difficult business than what it was being sold as," says Bronchick (who also plays guitar, on a Fender). "It was highly levered, there was a big question mark on growth and it was priced too high, which makes for a fairly toxic combination."
Though Fender remains the largest guitar-maker in the world and an iconic brand name, the market for guitars hasn't been great. The recent recession forced many people to reconsider purchasing luxury items such as electric guitars. The company had $700 million in sales last year, down from $712 million in 2008. About a quarter of Fender's net sales come from Europe, where financial uncertainty has lessened demand.
With the decline of rock music as a popular influence, teenagers interested in making music are more likely to spend their limited cash on computers or other electronics. The traditional garage band, the lifeblood of electric guitar sales, has given way to electro-pop made on a laptop.
Fender's attempt to go public could also be attributed to Weston Presidio's goal of cashing out. The firm was putting up a third of the shares in the offering. Going public would have allowed it to sell some of its stake now, and easily sell the rest in the future. "They can't own it forever, they have to raise equity in the company, sell and get out," says Bronchick.
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Weston Presidio paid $57.8 million for its stake in Fender back in December 2001. Fender used the money from the sale to help pay the shareholders who had orchestrated Fender's buyout from CBS in 1985. In 2005, Weston Presidio recapitalized the company thanks to a $320 million debt-financing package from Goldman Sachs (GS). Under terms of the deal, Fender had to pay Weston Presidio (along with other shareholders and employees) a total of $215 million in dividends and bonuses.
Fender continued to borrow money, most notably for its $117 million acquisition of competitor Kaman Music. After the deal, Fender's ratings outlook was downgraded by Moody's from "stable" to "negative" in 2007.
Most of Fender's current debt is owed to affiliates of J.P. Morgan (JPM), which was also one of the underwriters for the IPO. The debt has variable interest rates and comes with restrictions on Fender's spending ability, which means no dividends and slower growth.
Fender's debt problem consists not only of what it owes but what it is owed. The company is currently owed $11 million by its biggest customer, musical instruments retailer Guitar Center. Fender's fortunes are intrinsically linked to Guitar Center. The retailer accounts for nearly a sixth of Fender's annual sales, and Fender CEO Larry Thomas had previously held the same position at Guitar Center. Thomas was responsible for taking Guitar Center public and then selling it to Bain Capital in 2007. Until the sale, Guitar Center was also partially owned by Weston Presidio.
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Guitar Center has been losing money every year since, making it a nightmare investment for Bain Capital. Moody's rated it a lowly Caa2 (defined as "poor standing and subject to very high credit risk") in November 2010. In its report, the ratings firm stated that "the company's capital structure is unsustainable over the medium term at current levels of operating performance, and hence the probability of a default has increased."
The agency affirmed the rating in February this year and as of March, the principal balance on Guitar Center's outstanding long-term debt was $1.57 billion.
Corporate ownership was also a prickly subject for Fender fans. The 20 years it was owned by CBS—from 1965 to 1985—were regarded as the guitar-maker's worst period in terms of the quality of its product. Customers decried the cost-cutting measures that led to sub-standard production.
"The management at CBS handled Fender very poorly," says vintage guitar expert and guitar store owner George Gruhn. "Quality control was down, executives who had no knowledge of the industry screwed up the product and musicians were very unhappy."
Some Fender purists may be thrilled that the company shelved its IPO. "I say scoop up as many Fenders as you can now, regardless of year and country of construction, because after the IPO, they are never going to match that quality again," said one commenter on an online Fender forum.
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Old 07-27-2012, 01:20 PM
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Question well..

What do you think of this story?
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Old 07-27-2012, 03:48 PM
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They said the same things when synthesizers became affordable and compact forty years ago. It's just a generational cycle. Fender needs to buckle down, pay off the debt, concentrate on quality, and endure until the next generation discovers "garage band" as a reality, not a virtual reality.
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Old 07-27-2012, 10:28 PM
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Originally Posted by Scott Pope View Post
They said the same things when synthesizers became affordable and compact forty years ago. It's just a generational cycle. Fender needs to buckle down, pay off the debt, concentrate on quality, and endure until the next generation discovers "garage band" as a reality, not a virtual reality.
If only it was that easy. What if GC goes down? Or if Kaman or any of the other companies they bought don't do well? It's not just Fender any more.

It looks very very complicated.
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Old 07-28-2012, 07:20 AM
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I'm sure no expert, but seems to me like it should only be good for small companies and independent luthiers making quality instruments and gear. I do like my old Fender bass, but I couldn't care less what happens to the company now. And GC... don't even get me started...

If anything, maybe if these toy companies were to go under we could get back to looking at musical instruments more as real tools of the trade, and not just another mass produced trinket or wall ornament.
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Old 07-28-2012, 10:58 AM
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Default toy companies.. lol

Quote:
Originally Posted by Thomas Erickson View Post
I'm sure no expert, but seems to me like it should only be good for small companies and independent luthiers making quality instruments and gear. I do like my old Fender bass, but I couldn't care less what happens to the company now. And GC... don't even get me started...

If anything, maybe if these toy companies were to go under we could get back to looking at musical instruments more as real tools of the trade, and not just another mass produced trinket or wall ornament.
Well, if you have ever been to a NAMM show you might see just that, toy companies. Much of the goods falling in that category. Maybe the 80/20 rule applies here. Maybe 20% or less actual quality goods at a show.

Fender is an Icon in the Music industry and I respect them regardless of their acquisitions and product mix. Had this been a better economy over the last 5 years, we wouldn't even be discussing then.

Many many years ago SWR (way before Fender bought them) put out a great ad. The title with pictures of several brands of basses (us included) said "Judge us by the company we keep".

Based on that slogan, GC and Bain capitol are like a Boat anchor pulling the ship down. If GC goes down, Fender will be hurt but not dead. Independent stores on the other hand might start to thrive again once GC goes down by the wayside. Real estate owners renting out the 100+ locations to GC will have loses. The 1,000s of people employed by GC part and full time will be hurt as well. All of the other vendors giving credit to GC will also loose money. Some companies might fold if they have too many eggs in that basket.

This isn't totally about Fender. It's really about associations and risk. The stock market is healthy for the most part but some industries are struggling. A Fender IPO might be interesting if they didn't have that monkey on their back! With all their various companies acquired, they are spread kinda thin.

When GC went public, they raised money to open more stores and put more mom and pop shops out of business. When they were spending more than they were making, they were starting to look bad on their bottom line. Before a huge stock downgrade from their financial position was disclosed (I think), they were bought or bailed out (in part of whole?) by Bain Capitol. With all the bad PR on Bain right now (much of it deserved I'm sure) and Mitt Romney running for 'Job Killer and Chief', I don't think this strong connection with GC and it's bad debt is all that good for Fender's IPO.
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Old 07-29-2012, 11:42 AM
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Fender started by developing its own distribution network of small independent dealers through its own marketing department headed by Don Randall, decades ago, effectively creating their own markets. If GC goes down, which in my opinion would not be a great loss, Fender will find other marketing avenues. I refuse to be cynical.
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Old 07-29-2012, 02:25 PM
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Quote:
Originally Posted by Scott Pope View Post
Fender started by developing its own distribution network of small independent dealers through its own marketing department headed by Don Randall, decades ago, effectively creating their own markets. If GC goes down, which in my opinion would not be a great loss, Fender will find other marketing avenues. I refuse to be cynical.
Yes, I agree. Some people I have spoken with believe that GC is like a Cancer in the MI business eating away at the small dealerships that built this industry in the USA.
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Old 07-29-2012, 09:26 PM
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Ken, Thanks. That said, I must confess that I looked for a Gibson J45 acoustic guitar for over thirty years, for general playing and enjoyment, before I found the one for me with just the right combination of action and tone, and it did happen to be in the humidor at my local GC!

But the next part of how I paid for it confirms your above comment. After I had decided to purchase the guitar, knowing the local weather, I waited until a bad weather day, when the humidity was completely fouled up. I then went in, and, sure enough, it was having its temporary effect on all stock. I showed the inexperienced salesman the "tongue lift" that, "You know, I think I can work with it if you can give me a good deal." He gave me a significant discount, and I paid cash before he changed his mind. Of course, once home and properly humidified and set up, any "tongue lift" went right away, and I continue to enjoy the guitar.
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Old 07-29-2012, 09:51 PM
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Cool Also..

Fender started it's own accessory distribution for wholesale about 10 years ago or so. We became their 'Boutique' Bass String supplier. They would send us UPC labels and we would stick them on all the various sets they carried. We only have UPC's on a few sets so with some of the custom 5 and 6 string sets, they just made up their own UPC's and we stuck them on for them.

The top two distributors then in competition with them were Kaman (#1) and Musicorp (#2). Then, #1 bought or merged assets and forces with #2 becoming the biggest #1 with anyone else being a far distant #2 in the wholesale distribution game.

Shortly after that, Kaman/Musicorp merged with Fender, becoming like the ABC, NBC and CBS of Television all under one Team. At that time, Fender stopped carrying our Strings. Musicorp whom we had been selling strings to before would not continue offereng them due to the UPC issue and nor would they do with us what Fender had done, supply the labels in bulk for us to apply. We had been and are still selling them our Pro Formula Polish because we added a UPC code on the bottles and 6-pack boxes around that merge time.

So with all that happening on one side and the various brands bought up by Fender, the 2008 economic tumble was like getting hit from all sides. Adding the GC debt to all these Woe's makes Fender one not so happy Camper by the end of the day.

I do wish them a better future and would not be scared to jump into that IPO in some small way but at this time, Not even Fender thinks they are ready for Wall Street just yet.
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