While My Guitar Gently Weeps: Gibson Guitar Facing Bankruptcy

– Slash And Gibson Brands Chief Executive Henry Juszkiewicz

At January’s CES conference in Las Vegas, the annual technology conference that’s become a must-see showcase for startups and established companies, Gibson Brands chief executive Henry Juszkiewicz and Guns N’ Roses guitarist Slash couldn’t have looked more different posing for pictures before a horde of photographers as the CEO announced the rock icon was Gibson’s global brand ambassador. A rosy-cheeked Juszkiewicz wearing a red-orange-and-yellow necktie against a black shirt and black blazer; Slash a 100-percent rock star, with ripped jeans, a baseball cap worn backward and aviator glasses peeking out from behind frizzy hair that waterfalled onto a black leather jacket. But while Juszkiewicz and Slash appeared to be an odd couple, each has played a critical role in creating the Gibson of today.

Gibson was losing money when Juszkiewicz’s two former Harvard business school classmates acquired the flailing company in 1986 for a reported $5 million from Ecuadorian company Norlin Music Inc.  Annual sales were under $10 million at the time, according to a 1994 New York Times profile. Guns N’ Roses’ classic debut LP, Appetite For Destruction, was released in 1987, quickly launching the band to global stardom and putting Slash’s guitar of choice, Gibson’s iconic Les Paul, in front of millions of guitar players.

“Slash saved that company as much as Henry did,” claimed Todd Austin, electric guitar sales manager at Nashville’s Center Music, a mom-and-pop music shop in Nashville that caters to high-end, professional musicians.

The happy CES photo op, however, contrasted sharply with the company’s current dire financial straits. In need of capital to repay $375 million of bonds by the end of July, Gibson had announced in November the sale of factories in Memphis and Nashville.  In August 2017, Moody’s downgraded Gibson’s credit rating – called a “corporate family rating” that covers all debt – to Caa3, the third-lowest of the 21 ratings. Expressing doubts Gibson could refinance the $375 million notes before its Aug. 1 maturity, and describing Gibson’s capital structure as “unsustainable,” Moody’s dropped the $375 million notes to Ca, the second-lowest of all the ratings. Downgrades also hit Gibson in August 2016 and March 2016 for much of the same reasons.

As if to reassure bondholders, Gibson issued a press release on Feb. 15 that outlined the steps it is taking ahead of the bonds’ maturity date. Gibson said it “has met all current obligations to the bondholders,” meaning the company has not yet defaulted on its debt. It’s “in the process” of obtaining a credit facility to repay the bonds, an admission no deal has been reached but an assurance they’re working on it. And Gibson “fully expects the bonds to be refinanced in the ordinary course of business,” a subtle suggestion that bondholders will be repaid in full rather than receive pennies on the dollar in bankruptcy court.

It’s not that Gibson can’t make money. Sales in the instruments and pro-audio businesses are “profitable and growing,” Juszkiewicz said in a statement, although lower than in previous years. The Montana-based acoustic division is said to be making great products.

Moody’s estimates Gibson’s revenue to be roughly $1.2 billion across all product lines; the privately owned company does not publicly disclose either its revenue or earnings. But Gibson’s expansion into different audio businesses doesn’t appear to be working. Juszkiewicz added the company would be “streamlining” Philips products and “monetizing” underperforming business segments. Other products may merely die on the vine; in November Gibson disclosed it was ceasing production of the Cakewalk suite of digital audio tools for making electronic and sample-based music.

Fortunately, Gibson has assets to sell. In December, Gibson sold two properties to investors, Somera Road and Tricera Capital: the downtown Memphis property that housed a Gibson factory and showroom, and the downtown Nashville home of its Valley Arts brand. The Nashville Post reported the sale prices were $14 million for Memphis and $11 million for Nashville. The existing Memphis location, adjacent to the FedExForum and within a rock’s throw of the famous strip of blues bars on Beale Street, will be traded for a smaller facility. The Nashville sale is in doubt, however. A New York real estate investor sued Gibson to stop the sale of its dormant Valley Arts building to Somera Road and Tricera Capital. 

There are arguably two top-tier heritage brand names in electric guitars: Gibson and Fender. Gibson is such an iconic brand it is too big to fail – the name and company will continue regardless of financial situation. But Fender “is making smart choices,” said Center Music’s Austin. “They’re staying at home. The ultimate thing they do is try to refine and build better and better and better guitars. They’ll rebrand a little bit and change their line a bit, but they seem to be always moving forward, not backward.” In contrast, Gibson’s strategy was to become a more diversified audio company. In the last decade, Gibson has built a consumer electronics footprint that now includes Onkyo, Teac, Pioneer, and the Philips brand of audio and home entertainment products. To capitalize on the growing DJ and electronic music businesses, Gibson acquired KRK, Stanton, and the since-abandoned Cakewalk.

But just as the guitar is seeing a generational change – fewer guitar heroes, more interest in electronic and hip-hop music – traditional home audio products are facing greater competition from less expensive – and more than adequate – digital products. Edison Research found that 16 percent of the U.S. population already owns a voice-enabled smart speaker; Gartner forecasts 75 percent of households will have the devices by 2020. Amazon’s and Google’s smart speakers, the Echo and Google Home, integrate audio with online shopping. In January, Apple released its HomePod, a $350 speaker that emphasizes sound quality and integration with its Apple Music subscription service.

Financial woes seem commonplace in music. Last month, Moody’s did upgrade its outlook on Steinway, best known for its eponymous pianos, based on optimism the company will be able to refinance a $305 million term loan due in 2019. Music instrument retailer Guitar Center was acquired for $2.1 billion by private equity firm Bain Capital Partners LLC during the tail end of the pre-recession leveraged buyout era in 2007. (EMI Music was acquired the same year, also a debt-heavy deal by a private equity firm, but defaulted on its loans and was taken over by Citi.) The debt used to finance the Guitar Center acquisition also graded speculative and high risk for default, was downgraded in November 2017. Guitar Center will need to pay or refinance $990 million of debt by April 2019.

While there are secular trends affecting guitar sales, some of Gibson’s financial problems have been self-inflicted. The decision to place its G FORCE automatic string tuner in its 2015 electric guitars was widely believed to be a failure with long-lasting implications.

“It’s just a gizmo. Guitar players aren’t interested in gizmos,” said Austin. It was touted as a must-have feature but performed haphazardly and made stringing the instrument more difficult. The robo-tuner misstep was compounded by demanding terms Gibson planted on retailers – if a retailer wanted to carry one product line, it needed to stock another, for example. “If they make it fiscally unreasonable, retailers will carry something else,” said a music industry consultant and former executive.

Recent stumbles may have squandered the goodwill Gibson gained from its David-versus-Goliath fight with the U.S. government. In 2013, federal authorities raided Gibson factories in Memphis and Nashville and confiscated Madagascar wood alleged to have been imported illegally. The episode became cause celebre on government overreach, and Juszkiewicz’s harsh criticism of federal authorities received national attention. Gibson eventually settled and avoided criminal prosecution. Defiant to the end, Gibson memorialized the controversy in a limited series of Les Paul, Explorer, SG and Flying V six-string guitars with fretboards made of woods reclaimed from regulators.

The next few years could make or break Gibson. While the company did not return calls for comment, the company’s Feb. 15 statement claims refinancing its debt and re-focusing on its strongest products will be the best financial results in its history. What’s more, Gibson expects to pay back the company’s debt “within several years.” Those are lofty goals for a company staving off bankruptcy.

At least Gibson has Slash in its corner.