Bain Capital Acquires Guitar Center

Jun 28, 2007 3:06 AM  By

Private equity giant Bain Capital has acquired multichannel music instruments marketer Guitar Center. The transaction is expected to close in the fourth quarter and is subject to the approval of Guitar Center’s stockholders.

Under the agreement, Guitar Center shareholders will get $1.9 billion in cash, or $63.00 a share–a 25.8% premium over the June 26 closing price of $50.06. The transaction value, including assumed debt, is approximately $2.1 billion. The formerly public Guitar Center will now be privately held.

Guitar Center has 198 Guitar Center stores, and 97 Music & Arts Center stores. Its direct division includes print catalogs Musician’s Friend and The Woodwind & the Brasswind; direct sales rose 7% to $391.7 million last year, from $365.1 million in 2005.

Since 1984, Bain Capital has made private equity investments and acquisitions in more than 240 companies, including Toys “R” Us, Burlington Coat Factory, and Staples. Just over a week ago, Bain Capital, along with The Carlyle Group and Clayton and Dubilier & Rice, purchased the HD Supply business from Home Depot for $10.3 billion.

Lee Helman, managing director at New York-based investment bank Financo, says Guitar Center is a great growth vehicle for Bain Capital. Guitar Center has proven that it can grow organically and also make and integrate acquisitions, so Bain “is putting good money to work,” he says. Typical of private equity firms, Helman expects Bain to grow its investment with add-on acquisitions to ramp up sales for three to seven years and either take it public or sell it.

The deal wasn’t a surprise for many industry watchers. Analysts have been aware that a sale was possible since May and there was a lot of trading volume around that time, says David Solomon, co-CEO of New York-based investment bank Goldsmith Agio Helms. The multiple Bain paid for Guitar Center is a 12.1 times earnings before interest, taxes, depreciation and amortization (EBITDA), “and is quite attractive for a tier-1 property in its space.”

From a valuation perspective, this is a top multiple, Solomon says. “Guitar Center has loyal customers in the direct marketing segment and serves both the professional, the enthusiast, and the beginner. They are the dominant specialty in a fragmented industry with one big player.” It’s tough for mom-and-pop shops to compete with the sophistication or breadth of product with the big players, he notes. “So Guitar Center will continue to take share,” Solomon says.