I'm no financial expert and can barely read balance sheets. But it seems to me in the case of Guitar Center, an underperforming company was loaded with debt, and was sucked dry. Per dailykos.com, it is struggling to make its interest payments.
Beginnings:
Bain Capital buys Guitar Center, June 2007
Guitar Center's 2006 annual report is available on Edgar (scroll down).
According to the report, Guitar Center had sales of $2.03 billion, long-term debt of $103.1 million, net interest expense of $8.45 million, and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $86.2 million.
Fast forward five years. The annual report for 2011 reports sales of $2.08 billion, long-term debt of $996.8 million (Guitar Center) and $1.56 billion (Holdings). The EBITDA is $197 million. What is the problem? Guitar Center is drowning in its interest payments.
What is Holdings? A footnote explains:
Beginnings:
The Guitar Center story began in 1959 when Wayne Mitchell purchased a small appliance and home organ store in Hollywood, California. By 1961, he'd changed the name of the company to The Organ Center. In 1964, Joe Banaran, President of the Thomas Organ Company, approached Wayne in search of an outlet to sell a new line of guitars and amplifiers, called Vox.
The timing was right, and Wayne saw the chance to seize a new retail opportunity. He was in the midst of relocating his original Hollywood Organ Center location to a new site, and he agreed that rather than closing down the old store, he would stock it with Vox guitars and amplifiers. Wayne named the store The Vox Center. By the late sixties, it had become evident that the future of musical instrument retailing lay in guitars and amps, not organs, and The Vox Center was re-christened The Guitar Center.
Bain Capital buys Guitar Center, June 2007
Why was Guitar Center a target?
(Reuters) - Guitar Center Inc. GTRC.O said on Wednesday it agreed to be acquired by private equity firm Bain Capital Partners LLC for about $1.9 billion plus assumed debt.
Under the terms of the deal, Guitar Center stockholders will receive $63 in cash per share, marking a 26-percent premium over its closing price on Tuesday, the musical instruments retailer said in a statement.
As of March 31, the company had 30.17 million diluted shares outstanding, as reported in its first-quarter earnings report.
Total value of the transaction, expected to close in the fourth quarter, is approximately $2.1 billion including assumed debt, the company said.
Credit Suisse analyst Gary Balter said the company "seems like the perfect LBO."This means that their dominant position in the music and arts business could possibly be converted into higher earnings and margins, and hence value.
"They have a dominant retail position in a high service business yet significantly under-earn other high service oriented retail segments," Balter wrote in a research note following Guitar Center's announcement.
Guitar Center's 2006 annual report is available on Edgar (scroll down).
According to the report, Guitar Center had sales of $2.03 billion, long-term debt of $103.1 million, net interest expense of $8.45 million, and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $86.2 million.
Year ended December 31,
|
||||||||||||||||
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
(in thousands, except per share and operating data)
|
||||||||||||||||
Income statement data:
|
||||||||||||||||
Net sales
|
$
|
2,029,966
|
$
|
1,782,499
|
$
|
1,513,172
|
$
|
1,275,059
|
$
|
1,100,889
|
||||||
Cost of goods sold
|
1,435,963
|
1,262,097
|
1,087,899
|
931,014
|
810,474
|
|||||||||||
Gross profit
|
594,003
|
520,402
|
425,273
|
344,045
|
290,415
|
|||||||||||
Selling, general and administrative expenses
|
466,555
|
388,380
|
317,585
|
271,996
|
236,537
|
|||||||||||
Goodwill impairment
|
80,160
|
—
|
—
|
—
|
—
|
|||||||||||
Operating income
|
47,288
|
132,022
|
107,688
|
72,049
|
53,878
|
|||||||||||
Interest expense,
net
|
8,448
|
7,339
|
5,390
|
12,540
|
13,077
|
|||||||||||
Gain on sale of
property
|
2,115
|
—
|
—
|
—
|
—
|
|||||||||||
Income before income taxes
|
40,955
|
124,683
|
102,298
|
59,509
|
40,801
|
|||||||||||
Income taxes
|
40,531
|
48,005
|
38,873
|
22,649
|
15,545
|
|||||||||||
Net income
|
$
|
424
|
$
|
76,678
|
$
|
63,425
|
$
|
36,860
|
$
|
25,256
|
||||||
Diluted net income per share
|
$
|
0.01
|
$
|
2.67
|
$
|
2.29
|
$
|
1.47
|
$
|
1.09
|
||||||
Diluted weighted average shares outstanding (1)
|
28,402
|
29,846
|
28,976
|
26,119
|
23,130
|
|||||||||||
Operating data:
|
||||||||||||||||
Guitar Center net sales per gross square foot (2)
|
$
|
580
|
$
|
599
|
$
|
585
|
$
|
560
|
$
|
546
|
||||||
Net sales growth
|
13.9
|
%
|
17.8
|
%
|
18.7
|
%
|
15.8
|
%
|
16.0
|
%
|
||||||
Increase in Guitar Center comparable store sales (3)
|
3.7
|
%
|
5.8
|
%
|
9.7
|
%
|
6.9
|
%
|
6.5
|
%
|
||||||
Guitar Center stores open at end of period
|
198
|
161
|
136
|
122
|
108
|
|||||||||||
Ratio of earnings to fixed charges (4)
|
2.6x
|
6.5x
|
6.6x
|
3.5x
|
2.8x
|
|||||||||||
Net cash provided by operating activities (thousands)
|
$
|
21,583
|
$
|
65,710
|
$
|
85,506
|
$
|
58,005
|
$
|
12,248
|
||||||
EBITDA (thousands) (5)
|
$
|
86,180
|
$
|
161,022
|
$
|
129,992
|
$
|
92,669
|
$
|
70,738
|
||||||
Balance sheet and other data:
|
||||||||||||||||
Net working capital
|
$
|
326,539
|
$
|
287,098
|
$
|
269,859
|
$
|
198,713
|
$
|
110,825
|
||||||
Property and equipment, net
|
201,986
|
149,209
|
97,349
|
93,347
|
89,702
|
|||||||||||
Total assets
|
927,478
|
780,190
|
574,593
|
460,871
|
452,399
|
|||||||||||
Total long-term and revolving debt
(including current portion)
|
103,134
|
132,266
|
100,000
|
100,000
|
149,590
|
|||||||||||
Stockholders’ equity
|
542,737
|
404,817
|
306,682
|
214,171
|
154,928
|
|||||||||||
Capital
expenditures
|
84,417
|
75,493
|
26,151
|
24,245
|
26,309
|
Fast forward five years. The annual report for 2011 reports sales of $2.08 billion, long-term debt of $996.8 million (Guitar Center) and $1.56 billion (Holdings). The EBITDA is $197 million. What is the problem? Guitar Center is drowning in its interest payments.
Financial data of Holdings, except where otherwise indicated
Successor | Predecessor(1) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Period from October 10, 2007 to December 31, 2007(2) |
Period from January 1, 2007 to October 9, 2007(2) |
||||||||||||||||||
Year ended December 31, | |||||||||||||||||||
(Dollars in millions)
|
2011 | 2010 | 2009 | 2008 | |||||||||||||||
Income statement data:
|
|||||||||||||||||||
Net sales
|
$ | 2,082.6 | $ | 2,010.9 | $ | 2,004.2 | $ | 2,228.6 | $ | 631.5 | $ | 1,620.0 | |||||||
Gross profit
|
635.1 | 605.9 | 589.4 | 631.0 | 174.8 | 461.6 | |||||||||||||
Operating income (loss)
|
|||||||||||||||||||
Guitar Center
|
(96.8 | ) | 59.7 | (87.9 | ) | (202.2 | ) | 26.2 | 24.5 | ||||||||||
Holdings
|
(97.1 | ) | 59.7 | (87.9 | ) | (202.2 | ) | 26.2 | — | ||||||||||
Net income (loss)
|
|||||||||||||||||||
Guitar Center
|
(153.7 | ) | (8.9 | ) | (147.6 | ) | (185.3 | ) | (0.2 | ) | 6.3 | ||||||||
Holdings
|
(236.9 | ) | (56.4 | ) | (189.9 | ) | (219.5 | ) | (8.0 | ) | — | ||||||||
Balance sheet data (at end of period):
|
|||||||||||||||||||
Total assets
|
|||||||||||||||||||
Guitar Center
|
1,883.7 | 2,115.6 | 2,109.7 | 2,308.7 | 2,670.4 | ||||||||||||||
Holdings
|
1,859.1 | 2,120.7 | 2,140.1 | 2,318.1 | 2,702.2 | ||||||||||||||
Long-term debt
|
|||||||||||||||||||
Guitar Center
|
996.8 | 997.5 | 998.1 | 1,020.3 | 1,104.9 | ||||||||||||||
Holdings
|
1,561.5 | 1,562.1 | 1,490.9 | 1,450.4 | 1,479.9 | ||||||||||||||
Other financial data:
|
|||||||||||||||||||
Depreciation and amortization
|
106.2 | 104.9 | 113.8 | 137.0 | 24.4 | 34.8 | |||||||||||||
Capital expenditures(3)
|
57.3 | 47.9 | 45.2 | 39.4 | 16.5 | 50.8 | |||||||||||||
Adjusted EBITDA(4)
|
196.9 | 184.3 | 179.3 | 191.7 | 55.9 | 119.0 | |||||||||||||
Total Debt
|
|||||||||||||||||||
Guitar Center
|
997.5 | 998.1 | 1,018.9 | 1,028.9 | 1,107.0 | 160.7 | |||||||||||||
Holdings
|
1,562.1 | 1,562.8 | 1,511.6 | 1,458.9 | 1,482.0 | — | |||||||||||||
Other operating data:
|
|||||||||||||||||||
Increase (decrease) in Guitar Center comparable store sales(5)
|
3.7 | % | (0.1 | )% | (11.9 | )% | (5.3 | )% | 1.6 | % | 0.7 | % | |||||||
Guitar Center stores at beginning of period
|
214 | 214 | 214 | 214 | 213 | 198 | |||||||||||||
Opened Guitar Center stores
|
10 | — | — | — | 1 | 15 | |||||||||||||
Closed Guitar Center stores
|
— | — | — | — | — | — | |||||||||||||
Guitar Center stores at end of period
|
224 | 214 | 214 | 214 | 214 | 213 | |||||||||||||
Music & Arts stores at beginning of period
|
101 | 97 | 97 | 101 | 98 | 97 | |||||||||||||
Opened Music & Arts stores
|
3 | 4 | 2 | 2 | 3 | 9 | |||||||||||||
Closed Music & Arts stores
|
2 | — | 2 | 6 | — | 8 | |||||||||||||
Music & Arts stores at end of period
|
102 | 101 | 97 | 97 | 101 | 98 | |||||||||||||
What is Holdings? A footnote explains:
- On October 9, 2007, Guitar Center merged with an entity substantially owned by affiliates of Bain Capital. In connection with the merger, Holdings acquired all of the outstanding capital stock of the predecessor for aggregate cash consideration of approximately $1.9 billion. Holdings, which is substantially owned by affiliates of Bain Capital, owns 100% of the stock of Guitar Center.