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:
Lets get this one out of the way: there is nothing wrong with Gibsons core business of building guitars. This wasnt 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 Henrys 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 isnt unusual or wrong, but it assumes that the acquired business will generate enough cashflow to repay the acquisition financing. In this case, it didnt. In fact, the acquisition actually detracted from Gibsons 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 theres $375MM of debt and you can find a buyer at $400MM, youll 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, couldnt 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, theyll 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, theyll be reporting to an independent board and their strategic decisions will be held accountable by others. And yeah, theyre 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.
"The left hand steers and the right hand is the gas - If you can't steer, you shouldn't press the gas" -Paul Gilbert
"There's no money beyond the 5th fret" -Tommy Tedesco
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