Private equity keeps stabbing Guitar Center but it still won’t die

There’s no way to blame the pandemic for the bankruptcy of Guitar Center. But they’re still going to try.

The largest music gear retailer in the United States and a crucial part of the music scene here is broke and filed for bankruptcy in the Eastern District of Virginia in November 2020. Even before the papers were filed, analysts fed by friendly financial industry executives were selling the public on the myth that the pandemic was somehow to blame for the company’s misfortunes. Having to close their stores was a devastating blow, they claim, and the COVID-19 recession had left consumers unable to afford new musical equipment.

“The coronavirus has hit nonessential retailers hard,” Bloomberg reported, quoting Moody’s Investors Service, “and Guitar Center is vulnerable because purchases of musical instruments are highly discretionary. The pandemic has cost tens of millions of Americans their jobs, and many who are still employed have seen their pay cut substantially.”

That’s a nice story, and it is certainly true for a number of retailers and individuals steamrolled by the pandemic and subsequent lockdowns. But it has nothing to do with Guitar Center — a company buried alive in debt not from operations but from private equity buyouts and financial industry shenanigans.

Still the nation’s largest music gear retailer, Guitar Center is a shot zombie, staggering through the city and leaving a trail of blood behind it.

In fact, a week after Guitar Center filed for bankruptcy, Fender — the maker of guitars that are among the many instruments sold by Guitar Center — reported booming sales. Fender’s sales had actually grown 17% during the pandemic, despite having to shutter their factories and seeing 90% of its worldwide dealers’ physical stores closed. “We are anticipating 2021 being another record year,” Fender CEO Andy Mooney told CNBC after the company reported sales topping $700 million. The company re-opened their factories in April and even added extra shifts to keep up with demand.

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Many of Fender’s sales are coming from retailers such as Sweetwater, an e-commerce website that sells music gear. “At Sweetwater, we are seeing 50% to 100% year-over-year growth across most guitar brands,” Mike Clem of Sweetwater told CNBC, which includes “both acoustic and electric guitars, and at all price points.” Another of those retailers is Guitar Center itself, which expected that a Guitar Center exclusive called the “Fender Guitar Pack” will be “one of our hottest deals of the holidays.”

Obviously, Guitar Center sells a lot more than just guitars. But if guitars are selling well, and retailers that sell guitars are doing well, and one of those retailers includes Guitar Center, which also reports they are selling well — how can they blame the pandemic for the company’s woes?

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Guitar Center is a shot zombie, staggering through the city and leaving a trail of blood behind it. It’s been dead on its feet for more than a decade, existing as a financial vehicle to stuff with debt, financing fees and consultancy bills as it shuffles toward an inevitable collapse.

Why the company finds itself in bankruptcy is impossible to explain without first tracking the trail of blood to follow where the infection started and how the body got here.

The first progenitor of Guitar Center was known as “The Organ Center,” but the company frequently shifted its identity to keep up with music trends. It was a private company through most of its history, and grew very slowly at first. Wayne Marshall purchased The Organ Center in 1959 and the second location only opened (as the company had rebranded as Guitar Center) in 1972. By 1985, there were still only 12 Guitar Center stores.

But through the 1990s, the company opened nearly 70 new stores. In 1997, the company joined the IPO gold rush with a stock offering, and the capital raised by the IPO helped the company open even more outlets and buy several other music retailers to increase its retail footprint.

The expansion put Guitar Center in a dominant position, but the acquisition spree wasn’t intended to make it a great company. One of the likely outcomes of the company’s strategy was to make it an attractive target for private equity. A Credit Suisse analyst even called Guitar Center “the perfect” candidate for an LBO, or leveraged buyout.

If you’re looking for the point when guitar center was infected by zombies and began eating its own brains, the leveraged buyout by Bain Capital was it.

You don’t hear words like “corporate raider” or “hostile takeover” in the press anymore. The people who raid and takeover have spent a significant portion of their fortunes rebranding themselves as “corporate activists,” as if they’re humble and care-worn citizens holding signs outside Chicago police HQ.

Despite the new jargon, the fundamentals of leveraged buyouts haven’t changed much since their heyday in the 1980s. Private equity firms make an offer to buy all shares of a company’s stock, then the company itself usually gets loaded down with debt to finance much of the sale and pay off the interest on the money borrowed by the buyers.

The leveraged buyout of Guitar Center was carried out by private equity firm Bain Capital, in a sale overseen by their fellow masters of disaster, Goldman Sachs. Guitar Center’s board agreed to purchase the company’s 30.17 million shares for $63 each — 26% higher than its closing price on the day the sale was announced — for a total of $1.9 billion.

At the time of the sale, Guitar Center — described as having a “dominant retail position in a high service business” by analyst Gary Balter — held about $200 million in debt on $534 million in yearly sales. This isn’t great, but it isn’t atypical of a company undergoing expansion and was manageable in almost any circumstances.

The Bain LBO immediately saddled Guitar Center with a $650 million term loan, $750 million in notes and a $375 million credit facility as a result of the buyout.

The term sheet is staggering even 13 years later. If you’re looking for the point when Guitar Center was infected by zombies and began eating its own brains, this is it. Despite refinancing, debt-for-equity swaps and transfers of ownership, Guitar Center has never recovered from this and never will.

The fact that Guitar Center is still “the nation’s largest music instrument retailer” is almost beside the point to the people who now own it (after one of those debt-for-equity swaps, another private equity firm, Ares Capital Management, took over in 2014). In spite of its customers, it doesn’t even really exist to sell musical gear or even be a profitable company. Despite 10 straight quarters of sales growth leading up to the pandemic, Guitar Center never made a dent in the debt hung round its neck by private equity. By April 2020 the company negotiated a missed debt payment with creditors; it outright defaulted on a $45 million interest payment in October. Without a pandemic and run by the brightest minds in business, Guitar Center would have wound up in this same place. It was captured for the sole purpose of being gorged upon by every parasite on Wall Street, and then collapse.

It’s worth asking what this company, or this thing — this “company-thing” that trades under the name “Guitar Center” — even is. Eric Garland wrote in 2016 that Guitar Center is “literally an illusion that is still held by the good people of the musical instrument industry and the American consumer… It could be a flower shop, it could make auto parts, it could make apps for kids. It doesn’t matter. It’s just an opportunity to make some salary and billable hours and float some bonds for a few technocrats.” Four years ago, he added that this business model “ain’t built for 2020 and beyond.”

Garland also observed that every time Guitar Center had bad news to announce, they would “dispatch their PR and marketing to shout down any conclusions you might make.” Four years ago it was forcing all employees to give up workplace rights to sue the company and sign “arbitration agreements” or lose their jobs. Blaming the pandemic for the collapse of a company that had been so obvious it was called years ago is standard operating procedure.

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Bankruptcy isn’t the end for a company or thing or company-thing like Guitar Center — merely a blood transfusion that enables it to stagger a few more yards, take out a few more loans, enable a few thousand more billable hours before it falls to its knees again. It will stay in business during the bankruptcy process and is calling for new financing backed by existing creditors, “as well as $165 million in new equity investments” from its current owner, Ares, as well as ghoulish private equity firms Carlyle Group and Brigade Capital Management.

At some point it will go through bankruptcy again, or go through an IPO again, or be handed over to creditors and broken up and sold as pieces for pennies. They’ll probably have some new reason, maybe even a new pandemic to explain why at that point the company finally died. It’ll be wrong then, too.