Saw this in HCEG and thought it would be interesting to post here...
http://www.ft.com/cms/s/2/cad42764-...uid=e8477cc4-c820-11db-b0dc-000b5df10621.html
The complicated calculus of US manufacturing today often forces executives to alienate labor at the behest of investors and retailers, retailers at the behest of investors and labor, or investors at the behest of labor and retailers. But managers rarely hit the trifecta Gibson Guitar’s CEO and major shareholder Henry Juszkiewicz pulled off this year by estranging all three constituencies at once.
Juszkiewicz earned widespread praise for rescuing the brand in the mid eighties with a hands-on approach, only to draw equally widespread criticism in recent years for his autocratic management style. The owner dissolved Gibson’s board of directors in 2008 and spent free cash flow on dividends and subsidiaries, even as he failed to report earnings and flirted with covenant breaches, four sources familiar with Gibson’s financial travails told Debtwire.
While angry employees and retailers lack the leverage to change the CEO’s policies – including robot guitars, abandonment of small retailers and a revolving door of middle managers – Gibson’s lenders may force Juszkiewicz to play a different tune.
“This is a classic example of a company controlled by one individual,” said one of the sources familiar with the matter. “And with no independent board of directors and no public shareholders, the only mechanism that lenders have is the hammer of acceleration.”
Guitar dealers are equally critical. “In the guitar world, a lot of people are frustrated because they feel that [Juszkiewicz] has ruined the company because it’s all about his ego, not the guitars,” said a proprietor of an independent guitar store, who wished to remain anonymous. “Gibson and Fender [Music] are two American icons … and he is ruining one of those.”
The famed guitar maker violated terms on its USD 150m syndicated loan when it failed to deliver 2008 audited financials and is expected to show a breach of financial performance covenants for 2009 as covenant levels tightened, all of the sources said. The most recent forbearance of default expired in January and the company did not bother to extend it.
The only thing keeping lenders from accelerating on the debt is the IP value in Gibson’s brand, which is associated with high quality products and commands respect in the industry, all of the sources said.
“It’s not yet to the point that Gibson needs to restructure, but in the absence [of curing the default], part of me wonders if they are trying to stretch this game out as long as they can before the house of cards comes falling down,” one of the sources noted.
Juszkiewicz further irked lenders by using the company’s cash flow to pay a USD 3.5m dividend to equity holders and swept USD 9.5m into money-losing subsidiaries at the end of 2008, another of the sources said. Both activities are typically subject to covenant compliance, sources noted.
Going forward, Gibson’s lenders want to amend the credit agreement to reset the covenant levels and institute tighter financial controls over management’s behavior, said the sources. Among likely demands are the creation and maintenance of an independent board, as well as a mandatory excess cash flow sweep, they said.
In a written statement, Gibson responded that Juszkiewicz “rescued this true American icon from the brink of bankruptcy when he acquired it in 1985; and under his strong leadership the technology, quality, sales and profits have steadily increased over the years. Gibson is doing well and has drastically increased its market share under his insightful leadership.”
The statement went on to say that as a privately held company Gibson does not publicly disclose its financials. “Like any premier manufacturer, they operate under strict guidelines and are due diligent in reporting anything banks require, and continue to do so,” according to the statement.
Out of tune
While Gibson’s lenders only lost their patience recently with Juskiewicz, ire among the company’s retailers and employees has been building for years.
“People who are Gibson dealers end up having to have a lot more [product] than what they want to have,” said Kaan Howell, co-proprietor of Ludlow Guitars in New York. “We are not a Gibson dealer because it would be too expensive for us.”
Independent guitar stores still respect the quality of Gibson’s product but take issue with the manufacturer’s de-facto exclusive distribution arrangements with mega-stores like Guitar Center, said employees at four New York-based retailers. Gibson hasn’t officially banned independent guitar sellers but more than five years ago it began forcing them to spend at least USD 100,000-USD 150,000 on merchandise annually to remain in its supply chain, they said.
That policy squeezed out independent shops by requiring them to invest an outsized portion of their capital on few instruments given Gibson’s relatively high pricing per guitar. Both Howell and the anonymous dealer attributed Gibson’s change of strategy to the substantially larger contracts the mega-stores can negotiate. Sam Ash also carries a full line of Gibson products
Gibson’s statement said the company “has a precise dealer authorization plan as do many manufacturers of quality products. This is a common practice, both in the instrument business and in other business sectors. Gibson does work with many smaller independent dealers across the globe, in addition to the biggest music instrument retailers like Guitar Center and Best Buy.”
Guitar Center and Sam Ashe declined comment.
Regardless of its rationale for largely abandoning small retailers, Gibson’s move contrasts vividly with that of its largest competitor, Fender Music. Fender does deal with independent shops and offers a wider range of price points, with its pro gear averaging just over USD 2,000 per item compared to the USD 3,000 per item that Gibson charges, noted the dealers.
“Fender is a massive company/corporation just like Gibson … [and] they want you to sell more of their product and buy more of their product,” Howell said. “Fender is more flexible [than Gibson], at least with us.” A Fender spokesperson declined to comment on the matter.
As for Gibson’s labor force, gripes range from unpredictable work schedules to micro-management and excessive turnover in the executive suite, according to anonymous comments posted on the website www.glassdoor.com. Gibson is one of the lowest rated workplaces on the website with a rank of 709th out of the 713 companies listed, based on 67 employee reviews.
In its statement to Debtwire Gibson noted that “unfortunately, most large corporations have some ex-employees who are not happy with their former employer.” The statement went on to say that the company “employs thousands of talented executives and workers who are proud to be part of the US family that produces premier instruments that result in so much of the world’s beautiful and diverse music.”
The list of rock stars that have played Gibson guitars through the years includes icons such as Keith Richards, Allman Brothers, Chuck Berry, Steve Miller and Joan Jett. A recent spate of legal issues, however, temper some of the glamour.
Gibson dealt with a Federal Trade Commission investigation into price collusion, and a US Fish and Wildlife Service investigation into illegal rainforest timber importations that led to a raid on Gibson’s Nashville plant. The FTC declined to pursue charges as a result of its investigation, but the company is currently party to approximately 30 lawsuits that allege Gibson and other manufacturers and organizations conspired to fix prices of musical instruments.
Wanted: Financial Controls
Pressure began to build up on Gibson early last year when the company replaced auditor Grant Thornton with KPMG and three CFOs cycled in and out by mid-year, the sources said. In May, the company told lenders it would not deliver full year 2008 financials on time and blamed the delay to the management turnover, they added.
Loan holders have agreed to three waivers of the reporting default, the last of which expired in October. The lender group sent a “reservation of rights” letter to the company last November, and then in early December signed another forbearance. That agreement expired 26 January and has not been replaced, the sources said.
Holders of the USD 150m loan facility subsequently engaged law firm Bracewell & Giuliani to provide legal advice and to engage Gibson’s management in negotiations, the sources said. Bank of America Merrill Lynch serves as agent for the facility.
With no official earnings to reference, investors are forced to rely on projections. The company told lenders in November that it expects to report USD 29.3m of EBITDA in 2009, down only marginally from the preliminary year-over-year expectation of around USD 30m, one of the sources noted. If accurate, that slight decline is remarkable given the economic downturn and Gibson’s high price point, he added.
And despite its covenant problems, Gibson carries a relatively light debt burden. Assuming USD 118.5m outstanding on the credit facility, Gibson would be levered just over 4x at 31 December 2009, violating the 3.75x leverage covenant in place throughout 2009.
Lenders are still looking for an explanation of the 2008 reporting delay. The bank group hired FTI Consulting to perform a “quality of earnings” evaluation, and FTI concluded that no fraud had taken place, the sources said. Hilco Appraisal Services has also been retained to perform a valuation analysis of Gibson’s brand name and enterprise value, said one of the sources as well as a fifth source.
Gibson also just hired financial advisor SPP Capital to aid in an amendment process with current lenders or possibly to raise new private capital, two of the sources noted. The firm worked with Gibson in the past, placing a USD 150m senior bank transaction and a USD 50m mezzanine transaction for the guitar maker, according to SPP’s website.
Management now predicts that the audit will be complete by mid-April. But lenders have heard that story before.
“The bottom line is that nobody wants to pull the plug on the company, or force acceleration, because there is good underlying franchise value there and the brand name is so strong,” the first source said. “It’s a matter of working through what appears to be an inability or unwillingness on the part of management to get the lenders what they need. The question is how long will the bank group remain patient?”
KPMG and Bracewell & Giuliani declined comment. Spokespersons for BofA, Grant Thornton and SPP Capital did not return requests for comment.
http://www.ft.com/cms/s/2/cad42764-...uid=e8477cc4-c820-11db-b0dc-000b5df10621.html
The complicated calculus of US manufacturing today often forces executives to alienate labor at the behest of investors and retailers, retailers at the behest of investors and labor, or investors at the behest of labor and retailers. But managers rarely hit the trifecta Gibson Guitar’s CEO and major shareholder Henry Juszkiewicz pulled off this year by estranging all three constituencies at once.
Juszkiewicz earned widespread praise for rescuing the brand in the mid eighties with a hands-on approach, only to draw equally widespread criticism in recent years for his autocratic management style. The owner dissolved Gibson’s board of directors in 2008 and spent free cash flow on dividends and subsidiaries, even as he failed to report earnings and flirted with covenant breaches, four sources familiar with Gibson’s financial travails told Debtwire.
While angry employees and retailers lack the leverage to change the CEO’s policies – including robot guitars, abandonment of small retailers and a revolving door of middle managers – Gibson’s lenders may force Juszkiewicz to play a different tune.
“This is a classic example of a company controlled by one individual,” said one of the sources familiar with the matter. “And with no independent board of directors and no public shareholders, the only mechanism that lenders have is the hammer of acceleration.”
Guitar dealers are equally critical. “In the guitar world, a lot of people are frustrated because they feel that [Juszkiewicz] has ruined the company because it’s all about his ego, not the guitars,” said a proprietor of an independent guitar store, who wished to remain anonymous. “Gibson and Fender [Music] are two American icons … and he is ruining one of those.”
The famed guitar maker violated terms on its USD 150m syndicated loan when it failed to deliver 2008 audited financials and is expected to show a breach of financial performance covenants for 2009 as covenant levels tightened, all of the sources said. The most recent forbearance of default expired in January and the company did not bother to extend it.
The only thing keeping lenders from accelerating on the debt is the IP value in Gibson’s brand, which is associated with high quality products and commands respect in the industry, all of the sources said.
“It’s not yet to the point that Gibson needs to restructure, but in the absence [of curing the default], part of me wonders if they are trying to stretch this game out as long as they can before the house of cards comes falling down,” one of the sources noted.
Juszkiewicz further irked lenders by using the company’s cash flow to pay a USD 3.5m dividend to equity holders and swept USD 9.5m into money-losing subsidiaries at the end of 2008, another of the sources said. Both activities are typically subject to covenant compliance, sources noted.
Going forward, Gibson’s lenders want to amend the credit agreement to reset the covenant levels and institute tighter financial controls over management’s behavior, said the sources. Among likely demands are the creation and maintenance of an independent board, as well as a mandatory excess cash flow sweep, they said.
In a written statement, Gibson responded that Juszkiewicz “rescued this true American icon from the brink of bankruptcy when he acquired it in 1985; and under his strong leadership the technology, quality, sales and profits have steadily increased over the years. Gibson is doing well and has drastically increased its market share under his insightful leadership.”
The statement went on to say that as a privately held company Gibson does not publicly disclose its financials. “Like any premier manufacturer, they operate under strict guidelines and are due diligent in reporting anything banks require, and continue to do so,” according to the statement.
Out of tune
While Gibson’s lenders only lost their patience recently with Juskiewicz, ire among the company’s retailers and employees has been building for years.
“People who are Gibson dealers end up having to have a lot more [product] than what they want to have,” said Kaan Howell, co-proprietor of Ludlow Guitars in New York. “We are not a Gibson dealer because it would be too expensive for us.”
Independent guitar stores still respect the quality of Gibson’s product but take issue with the manufacturer’s de-facto exclusive distribution arrangements with mega-stores like Guitar Center, said employees at four New York-based retailers. Gibson hasn’t officially banned independent guitar sellers but more than five years ago it began forcing them to spend at least USD 100,000-USD 150,000 on merchandise annually to remain in its supply chain, they said.
That policy squeezed out independent shops by requiring them to invest an outsized portion of their capital on few instruments given Gibson’s relatively high pricing per guitar. Both Howell and the anonymous dealer attributed Gibson’s change of strategy to the substantially larger contracts the mega-stores can negotiate. Sam Ash also carries a full line of Gibson products
Gibson’s statement said the company “has a precise dealer authorization plan as do many manufacturers of quality products. This is a common practice, both in the instrument business and in other business sectors. Gibson does work with many smaller independent dealers across the globe, in addition to the biggest music instrument retailers like Guitar Center and Best Buy.”
Guitar Center and Sam Ashe declined comment.
Regardless of its rationale for largely abandoning small retailers, Gibson’s move contrasts vividly with that of its largest competitor, Fender Music. Fender does deal with independent shops and offers a wider range of price points, with its pro gear averaging just over USD 2,000 per item compared to the USD 3,000 per item that Gibson charges, noted the dealers.
“Fender is a massive company/corporation just like Gibson … [and] they want you to sell more of their product and buy more of their product,” Howell said. “Fender is more flexible [than Gibson], at least with us.” A Fender spokesperson declined to comment on the matter.
As for Gibson’s labor force, gripes range from unpredictable work schedules to micro-management and excessive turnover in the executive suite, according to anonymous comments posted on the website www.glassdoor.com. Gibson is one of the lowest rated workplaces on the website with a rank of 709th out of the 713 companies listed, based on 67 employee reviews.
In its statement to Debtwire Gibson noted that “unfortunately, most large corporations have some ex-employees who are not happy with their former employer.” The statement went on to say that the company “employs thousands of talented executives and workers who are proud to be part of the US family that produces premier instruments that result in so much of the world’s beautiful and diverse music.”
The list of rock stars that have played Gibson guitars through the years includes icons such as Keith Richards, Allman Brothers, Chuck Berry, Steve Miller and Joan Jett. A recent spate of legal issues, however, temper some of the glamour.
Gibson dealt with a Federal Trade Commission investigation into price collusion, and a US Fish and Wildlife Service investigation into illegal rainforest timber importations that led to a raid on Gibson’s Nashville plant. The FTC declined to pursue charges as a result of its investigation, but the company is currently party to approximately 30 lawsuits that allege Gibson and other manufacturers and organizations conspired to fix prices of musical instruments.
Wanted: Financial Controls
Pressure began to build up on Gibson early last year when the company replaced auditor Grant Thornton with KPMG and three CFOs cycled in and out by mid-year, the sources said. In May, the company told lenders it would not deliver full year 2008 financials on time and blamed the delay to the management turnover, they added.
Loan holders have agreed to three waivers of the reporting default, the last of which expired in October. The lender group sent a “reservation of rights” letter to the company last November, and then in early December signed another forbearance. That agreement expired 26 January and has not been replaced, the sources said.
Holders of the USD 150m loan facility subsequently engaged law firm Bracewell & Giuliani to provide legal advice and to engage Gibson’s management in negotiations, the sources said. Bank of America Merrill Lynch serves as agent for the facility.
With no official earnings to reference, investors are forced to rely on projections. The company told lenders in November that it expects to report USD 29.3m of EBITDA in 2009, down only marginally from the preliminary year-over-year expectation of around USD 30m, one of the sources noted. If accurate, that slight decline is remarkable given the economic downturn and Gibson’s high price point, he added.
And despite its covenant problems, Gibson carries a relatively light debt burden. Assuming USD 118.5m outstanding on the credit facility, Gibson would be levered just over 4x at 31 December 2009, violating the 3.75x leverage covenant in place throughout 2009.
Lenders are still looking for an explanation of the 2008 reporting delay. The bank group hired FTI Consulting to perform a “quality of earnings” evaluation, and FTI concluded that no fraud had taken place, the sources said. Hilco Appraisal Services has also been retained to perform a valuation analysis of Gibson’s brand name and enterprise value, said one of the sources as well as a fifth source.
Gibson also just hired financial advisor SPP Capital to aid in an amendment process with current lenders or possibly to raise new private capital, two of the sources noted. The firm worked with Gibson in the past, placing a USD 150m senior bank transaction and a USD 50m mezzanine transaction for the guitar maker, according to SPP’s website.
Management now predicts that the audit will be complete by mid-April. But lenders have heard that story before.
“The bottom line is that nobody wants to pull the plug on the company, or force acceleration, because there is good underlying franchise value there and the brand name is so strong,” the first source said. “It’s a matter of working through what appears to be an inability or unwillingness on the part of management to get the lenders what they need. The question is how long will the bank group remain patient?”
KPMG and Bracewell & Giuliani declined comment. Spokespersons for BofA, Grant Thornton and SPP Capital did not return requests for comment.
