Gibson files for Chapter 11

Discussion in 'Guitars in General' started by tealsixtysix, May 1, 2018.

  1. LeicaBossNJ

    LeicaBossNJ Silver Supporting Member

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    Now the turnaround artist - Mr. Brian Fox.

    DOCUMENT HERE

    He submitted a nice dating profile to the courts. He'll be leading this effort - with the end result being the reins handed over to a different party to run the restructured business.
    • Hofstra/Fordham guy based out of NY. Go Mets!
    • He's got 25 years consulting experience - focusing on restructuring
    • Greatest hits include Ceasars (if you do this in NY/NJ, you need to work with at least one Bankrupt Casino), Momentive (I've bought materials from them - good stuff), Performance Sports Group, Xerium
    • Brad Paisley, Joe Bonamassa, Keith Richards, Dave Grohl and Elvis Costello are mentioned as Gibson guys
    Other tidbits:
    • They sell 170k guitars a year. They claim to be #1 in share in the "premium electric guitars" segment
    • They sell 40% of the world's guitars over $2,000 (Edit: and 97% guitars over $2,000 with warped necks and action 5/64")
    • They claim to have contacted 58 parties to evaluate a sale, getting NDAs from 27 - nobody wanted the "Gibson Innovations" business in the end
     
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  2. LeicaBossNJ

    LeicaBossNJ Silver Supporting Member

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    Finally - this is what happens to Henry J. He's out.

    1. The noteholders debt would be converted into "all or substantially all" of the equity in the reorganized Gibson
    2. Henry and Berryman's equity will be cancelled as part of the Plan
    3. Henry and Berryman will be paid to "assist the new owners" in transition. This is their "payoff" for cooperation:
    A. It's for 1 year
    B. Berryman gets $3.35million and 5 year warrants up to 2.25% and health insurance
    C. Henry gets $2.1million in fees, 2.25% equity plus health insurance
    D. Henry - for the TEAC part of the deal - gets $1.5million profits interest in TEAC shares
     
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  3. BaoBao

    BaoBao Member

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    This was also my conclusion. It may be called a "consultancy" fee, but I seriously doubt they will ask him for much advice. Mostly they will ask him to stay away from the factory and offices.
     
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  4. LeicaBossNJ

    LeicaBossNJ Silver Supporting Member

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    His and Berryman's abstention from the Board vote is the only concerning bit - without knowing the inside issues - one must wonder if they blessed this deal or are going to put up some kind of fight.
     
  5. wetordry

    wetordry Member

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    Quite the thing to be remembered by, the guy who trashed an American icon while the customers begged for the carnage to stop.
    Oh well. Nothing to see here.
     
  6. johnnytuinals

    johnnytuinals Member

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    If Gibson went BK7 they could just walk away from everything.
    Going with BK11 means that the Creditors get paid back at some point,but
    when is some point when you owe $700 Million.Could take Gibson Yearssss
    to pay back what they owe with BK11.

    Myself BK11 will fall apart
    And All 2020 Gibsons will be made in China and the custom shop will be in the states.JT
     
  7. Mark 63

    Mark 63 Member

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    This is the part that’s being misunderstood. The only way HJ could make the debt go away was to hand over his equity. Once this plan is approved by the court, he owns nothing. The creditors hold all of the cards. It’s over.
     
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  8. Presc

    Presc Member

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    Given all the information that's now in the public domain, I thought it would be helpful to post a more fulsome and professionally informed recap of what happened and what's happening next. I'm not a restructuring guy, but I do work in private equity and figured some might find it interesting to read a "plain English" version of today's filings.

    Finally, all the public domain info is here if you want to dig into the nitty gritty: https://cases.primeclerk.com/gibson/Home-DocketInfo

    What Happened:
    Let’s get this one out of the way: there is nothing wrong with Gibson’s core business of building guitars. This wasn’t about robot tuners or having too many version of the Les Paul. Guitar sales grew 10% in the past year, and the guitar business generated $26MM of EBITDA (cashflow, more or less) in 2017. That's not to say the guitar division couldn't be run more effectively, but this bankruptcy was driven by Henry’s attempt to grow the company beyond guitars.

    In 2014, Gibson acquired a consumer electronics business from Philips. Gibson raised $150MM of debt to fund the acquisition, materially increasing its long-term debt load from $225MM to $375MM. This method if funding an acquisition isn’t unusual or “wrong”, but it assumes that the acquired business will generate enough cashflow to repay the acquisition financing. In this case, it didn’t. In fact, the acquisition actually detracted from Gibson’s profitable before even considering interest on the debt borrower to acquire it – the acquired division had negative $7MM of EBITDA in 2017. In summary, the acquisition left Gibson, in the aggregate, with MORE debt and LESS cashflow.

    This debt was set to become due and payable in 2018. As the maturity date approached, Gibson and its bankers looked for new lenders who would be willing to refinance the business. There were no takers. Gibson next looked to sell the company. The idea here is that if there’s $375MM of debt and you can find a buyer at $400MM, you’ll use the sale proceeds to repay the loans and hand the current ownership group a pittance – but better than losing it in all in bankruptcy. They ran out of time to effectuate a sale, couldn’t make their loan payments, and the lenders have dragged the Company into Chapter 11.

    What Happens Next:
    The process should move quickly. Most of the constituents have agreed on a plan of reorganization. The Philips, or “GI” division will be liquidated. The guitar building division and a few other pro audio businesses will be restructured

    Henry used to own 36% of the company; Berryman 49%. Their equity stakes have been wiped out. The current lenders now own 100% of the company. The current lenders have agreed to provide an additional $135MM of new loans, called a “DIP” financing. The DIP financing provides liquidity for the company to continue operating as usual. Once the company exits bankruptcy, they will look for a new loan from 3rd party lenders to refinance the DIP facility. This will effectively result in a “new” Gibson that has shed an unprofitable subsidiary, has about 1/3rd of the pre-bankruptcy debt, and new ownership.

    The creditors here are not natural long-term owners. Look at the names – KKR Credit, SilverPoint, Grantham, etc. Distressed debt investors. Once the company is cleaned up in bankruptcy and refinanced, they’ll look to sell. Henry and Berryman have 1-year management contracts and will basically act as a transitional management team. A new owner will likely make the decision on whether to keep them or find new management. Even if kept, they’ll be reporting to an independent board and their strategic decisions will be held accountable by others. And yeah, they’re each getting a couple million bucks for their year of work and some long-term kickers if the company does well over time.

    Finally, I'll get on my soapbox and say that PE ownership is not just about cost cutting. There are two ways to boost the bottom line - reduce expenses, or grow the business. Some companies have too much fat and call for cost cutting. Some companies have an interesting growth opportunity and can actually benefit from fresh capital and a growth strategy. Sometimes both apply. In the interim, I wouldn't expect big changes at Gibson. They'll stay the course. In a couple years, we'll see. It really depends on who ends up owning it and their vision.
     
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  9. Toosday

    Toosday Member

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    Great and informative post. I believe that cost cutting will be the primary role for PE as the guitar market as a whole has some growth challenges especially coming off of a period of huge amounts of customer credit issued. Ie future purchases brought forward . You may disagree and that is cool. We can see how it plays out together.
     
  10. Stratburst70

    Stratburst70 Member

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    Gibson is still doomed.

     
  11. Alan Dunn

    Alan Dunn Member

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    Great work Presc. I think I now understand what's happening.
     
  12. stealthtastic

    stealthtastic Member

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    Nice summary. Good point in the end too. PE has been quite growth focused for a while now and I think the label people in the industry get as ruthless Gordan Gecko 2.0s is unjustified.

    This whole thing is kind of ironic though as IIRC Henry & Co. bought the company in a similar way back in the day.


     
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  13. Powderfinger

    Powderfinger Gold Supporting Member

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    Not correct. Creditors almost always still take a haircut.
     
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  14. Boris Bubbanov

    Boris Bubbanov Member

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    I'm not there, yet.

    Too many people (such as the Bankruptcy Judge) have not been heard from yet. Some people will be left out in the cold under this proposal, and my sense is at least some of them will put up a fight - and not just let their claims wash down the drain. If nothing else, the unpaid and partially paid debtors can slow the re-org down to a grind, for a while. My natural impulse is, why should Juszkiewicz and Berryman emerge with anything? I know, as well as anyone here, if you need someone's signatures to speed up the transition, you throw them a few seeds, but this is a lot of seeds and Henry was absolutely unapologetic in the way he put screws in other people. He's not a Telegenic Claimant in any way. He should be looking at only crumbs.

    Yes, I know bankruptcy judges are not Article III Judges, but they can put some pain on you, when they feel so inclined. I think the P E guys are getting ahead of themselves here - what we see today is a Blueprint, IMO and not much more.
     
    Last edited: May 1, 2018
  15. BaoBao

    BaoBao Member

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    Except he won't. He gets tied to a tree somewhere out in the back (but with a golden leash, sure) where he can bark and **** as much as he wants.
     
  16. Presc

    Presc Member

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    Thank you, and I think that's an entirely fair position. It's hard for any of us to say without digging into the guts of the business, but I probably agree - with the caveat that cost cutting and lower quality don't have to go hand in hand. This management team has been in place for a long time, and a fresh set of eyes might be able to build a better mousetrap. I recall reading that much of Gibson's equipment is quite old - so for example, someone could come in with some capital (for which Gibson's been starved) to invest in the business and make a better or equivalent product more profitably.
     
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  17. coldengray

    coldengray Supporting Member

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    SilverPoint is one of the new owners. I worked for a company that they bought years ago; they stripped the place down to it’s bones to drain all profits which absolutely crushed morale and sent operations into a tailspin that it still hasn’t recovered from. Thankfully I got out. Let’s pray Gibson doesn’t suffer the same fate.
     
    Last edited: May 2, 2018
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  18. Stinky Kitty

    Stinky Kitty Silver Supporting Member

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    You knew by the end of the day, somebody was going to do it.

    [​IMG]
     
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  19. BlueRiff

    BlueRiff Member

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    Henry is OUT: He no longer has ownership. Merely a consultant now...
     
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  20. BlueRiff

    BlueRiff Member

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    He lost ownership. For all practical purposes - he'll be on a short time then retire.
     
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