Nashville country artist Tim Montana speaks about a Gibson Les Paul custom made to benefit the Chris Kyle Foundation at the Gibson Custom Shop, Wednesday, May 11, 2016, in Nashville, Tenn. Andrew Nelles / The Tennessean
Gibson Brands, the iconic guitar company based in Nashville, filed for bankruptcy protection on Tuesday after years of financial turmoil and a failed attempt at evolving into a musical lifestyle company.
The company, which filed for Chapter 11 bankruptcy protection in Delaware, has struck a deal with the majority of its creditors that will allow business to continue and its instrument manufacturing to carry on.
But experts say the bankruptcy foreshadows the departure of CEO Henry Juskiewicz, who, along with partner Dave Berryman, rescued Gibson from the brink of collapse 32 years ago and returned the company to prominence. Gibson makes guitars, banjos and mandolins and its subsidiary, Baldwin, is a popular piano maker.
What went wrong
As more popular music has been made with computers, international guitar sales began to slip, creating a challenge for larger manufacturers and retailers like Gibson. In response, Juskiewicz oversaw an aggressive strategy that expanded Gibson from a guitar company into a lifestyle brand. The company acquired electronics companies that made headphones, speakers and turntables.
As Gibson took on more debt to acquire Phillips, Onkyo and other electronics companies, its annual revenue grew and its profit margins shrunk.
In 2010, Gibson brought in $300 million in total sales and showed an earnings-before-taxes-and-interest margin of 12.9 percent on its balance sheet. By 2015, Gibson was doing $2.1 billion in annual revenue, but its profit margin had dropped to 4 percent.
Over-leveraged, Gibson had been negotiating with banks and creditors for months. A July 23 deadline loomed for maturities on over $500 million of funded debt obligations, the company filed for bankruptcy. Juskiewicz owns 36 percent of the company.
As part of the bankruptcy, Gibson announced it will kill its innovations division.
“Over the past 12 months, we have made substantial strides through an operational restructuring,” Juszkiewicz said in a statement, adding that Gibson will “refocus on our core business” of musical instruments, which “we believe will assure the company’s long-term stability and financial health.”
Expert: Expansion to lifestyle brand was a mistake
Gibson’s guitar business has actually been on the uptick, according to the bankruptcy filings, rising 10.5 percent from January 2017 — $110 million to $122 million during the same 12-month period.
Gibson enjoys 22 percent market share in electric guitars, and 40 percent market share for guitars selling for more than $2,000, including the iconic Les Paul model. Gibson is known for providing guitars to stars such as Elvis Presley, BB King, Keith Richards, Pete Townsend and Lenny Kravitz.
Gibson’s guitars include the SG, Flying V, Explorer, J-45 and Hummingbird. But, the company believed that expanding into electronics and creating a music-centered lifestyle brand was the key to overall growth.
Among its acquisitions was TEAC, a publicly-traded Japanese company that makes home audio equipment. Gibson owns 54 percent of that company, with an estimated value of $63.5 million, according to the bankruptcy filing
George Gruhn, the owner of Nashville instrument retailer Gruhn Guitars and a nationally recognized guitar expert, said the failure of the company was easy to predict once Gibson expanded into a broader musical lifestyle company.
In addition to its debt, the company has had substantial turnover in its senior financial management, which analysts have cited as a major problem.
Gibson actually paid down on its initial term loan agreement with creditors since last fall, dropping the principal balance from $60 million to $24 million, according to the filings. But those paydowns have “exacerbated liquidity issues,” the company said in its bankruptcy.
“My hope is that Gibson will survive as a company. But I think for Gibson to turn around it will require new management,” Gruhn said. “The failure was totally avoidable and I lay entirely at being Henry’s fault. He overstepped and what he did was completely avoidable.”
For fans of guitars, this is ‘a good sign’
A federal judge will be required to sign off on the company’s plan to shed debt, which has the support of 69% of secured lenders on notes due in 2018.
Josh Friedman, senior legal analyst at Debtwire, said that a key takeaway for fans of Gibson’s instruments is that the business will continue operating, though with Juskiewicz no longer in an ownership position.
Under the terms of the deal, the company’s creditors, the largest of which is KKR Credit Advisers, will take over ownership.
“For people who are worried about whether there will still be Gibson guitars, this is a good sign,” Friedman said. “When you have investors willing to invest additional funds and take over control, in contrast to the flipside, you could look at a liquidation instead of a reorganization.”
Friedman said the challenges facing Gibson mirror those that other major retailers, like Toys R Us, have confronted, including too much leverage and a changing retail landscape.
“My bottom line takeaway is that Gibson is following the trend of a lot of retailers in that Gibson is coming in with a deal with its creditors,” Friedman said. “This will allow for a smooth transition to new owners.”
Bankruptcy is ‘really sad’
In Nashville’s creative community, news of the bankruptcy was met with sadness. The company sponsors local musicians’ tours, and provides them with instruments in exchange for sponsorship deals.
Independent country music artist Tim Montana has been partnered with Gibson since 2013. Montana worked with Gibson to produce two specially made guitars that were auctioned at charity, with the proceeds going to nonprofits that aid veterans.
“I just heard about it and it’s really sad,” Montana said. “For a company that is that big and an iconic, legendary brand that’s changed people’s lives, to see them file for bankruptcy, you think, ‘How did this happen?’
“There’s a lot of friends over there and that have left the company. It’s a sad day for music, for rock and roll, for every body.”
Nathan Bomey of USA TODAY contributed
Reach Nate Rau at 615-259-8094 and email@example.com. Follow him on Twitter @tnnaterau.