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Guitar Center picked for sale

A private equity firm will pay $2.1 billion to acquire the company.

June 28, 2007|Leslie Earnest | Times Staff Writer

Guitar Center Inc., which opened its first store in Hollywood almost half a century ago and expanded to become the largest purveyor of musical instruments in the U.S., is being acquired for $2.1 billion.

Bain Capital Partners, a Boston-based private equity firm that holds major stakes in a range of companies including Warner Music Group Corp., Toys R Us Inc. and Burger King Holdings Inc., is expected to take Guitar Center private if the acquisition goes through as planned by the end of the year.

Stockholders would be paid $63 for each share, a 26% bump over Tuesday's closing price. That struck a chord with investors, who pushed the stock up almost 20%, or $9.92, to $59.98 on Wednesday.

After rising every year from 2000 through 2004, Guitar Center's stock stalled and then fell -- 5% in 2005 and 9% in 2006 -- and was mostly treading water this year until buyout rumors drove the shares higher in late May.

Jose Negrete, a student, wasn't as upbeat as investors about the deal. The Anaheim resident worried that the new owners would make changes. Right now, Guitar Center stores are "musician-friendly" and let customers try out the instruments, said Negrete, 31.

"They don't want you to break it necessarily, but they don't mind if you jam on the guitar or do a little drum solo."

Going private could make it easier for Guitar Center to achieve its goal of expanding beyond the U.S., where it operates more than 210 Guitar Center stores, said Joan Storms, an analyst at Wedbush Morgan Securities in Los Angeles.

"They could probably achieve their investment strategy sooner and more efficiently in the private marketplace," Storms said. "In the public marketplace, they would have to meet investors' expectations on a quarterly basis."

The new owners may opt to close some stores, she said, adding that Guitar Center may be experiencing some "cannibalization" of sales because it has so many shops.

That would be a bummer as far as Negrete is concerned. He said downsizing "would totally suck" and be detrimental to "up-and-coming musicians, especially young kids."

The retailer, which had revenue of $2.03 billion last year, sells guitars, amplifiers, drums and keyboards and relies heavily on sales to professional musicians. It also operates more than 95 Music & Arts stores, which sell and rent band instruments. Its Musician's Friend Inc. unit sells musical instruments via catalogs and websites.

After the deal was announced Wednesday, analyst Gary Balter, with Credit Suisse First Boston, sent a note to clients saying that he suspected the new owners might sell Music & Arts. Neither Music & Arts nor Musician's Friend offer the promise of the core business, he said.

Bain Capital plans to continue to work with Guitar Center's management team to build the business, said Jordan Hitch, a managing director at the private equity firm.

After a strong sales streak, guitar sales fell off last year, leaving some in the industry to wonder what went wrong. Storms said some recent music trends were changing.

"Basically, the guitar business is driven by rock 'n' roll music trends. The current music style tends to be more almost technology-driven," she said. "It's not a driver of guitar sales."

Guitar Center's roots stretch to 1959, when former accordion and car salesman Wayne Mitchell bought a small appliance and organ store in Hollywood. In 1964, one of Mitchell's suppliers started producing Vox amplifiers and told Mitchell he would have to sell some amplifiers if he wanted to keep selling organs. So Mitchell converted a movie theater and stocked it with Vox amps, giving birth to Guitar Center.

A second store opened in 1972 and became a magnet for local musicians, the company's website says. Chief Executive Marty Albertson began working for the budding chain in 1979.

The flagship Guitar Center store on Sunset Boulevard in Hollywood became a tourist attraction with its "Rock Walk" enshrining the handprints of famous musicians. By the 1990s, the website says, it had claimed the title as the "largest musical instrument retailer in the world." It went public in 1997.

The deal with Bain Capital marks the culmination of an auction led by Goldman Sachs & Co. to solicit buyers for the retailer.



Begin text of infobox

At a glance

Guitar Center Inc.

Based: Westlake Village

Founded: 1964

Major business: The leading U.S. retailer of guitars, amplifiers and other music and recording equipment

Guitar Center stores: More than 210

2006 sales: $2.03 billion

2006 operating income before one-time write-offs: $127.4 million

Bain Capital Partners

Based: Boston

Founded: 1984

Major business: Global private investment firm

Assets under management: About $50 billion


Source: Times research

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