Reorganization plan wipes out shareholders
LOOMING MATURITIES on approximately $500 million in debt have forced Gibson Brands to file for chapter 11 bankruptcy protection on May 1. Under a proposed reorganization plan, the company will liquidate the consumer electronics business it acquired from Philips in June of 2014 and focus its resources on its musical instrument business, which includes the Gibson and Epiphone guitar brands, and the KRK and Stanton audio brands, according to documents filed in a Delaware court. Court filings indicate that 69% of the bond holders have agreed in principle to provide $135 million in debtor-in-possession financing to fund the continuing operation of the musical instrument business during the bankruptcy proceedings.
Gibson CEO Henry Juszkiewicz (left) and President Dave Berryman
The proposed reorganization plan wipes out the ownership stake of existing Gibson shareholders, including CEO Henry Juszkiewicz, who held a 36% stake, and President Dave Berryman, who held a 49% stake. However, Berryman will be retained for a one-year period at a salary of $3.35 million to aid in a management transition, and Juszkiewicz will receive $2.1 million to provide consulting services for a year. Juszkiewicz will also receive approximately $1.5 million in profits from the sale of shares in TEAC held by Gibson brands. Juszkiewicz and Berryman will each also receive warrants to purchase a 2.25% interest in the reorganized company over the next five years.
Court filings indicate that Gibson's core musical instrument and pro audio businesses are financially viable unlike the struggling consumer electronics division, which operates under the Gibson Innovation banner. In the fourth quarter of 2017, the musical instrument business achieved earnings before interest, taxes, depreciation, and amortization (EBITDA) of $26 million on revenues of $71 million. By contrast, Gibson Innovations had negative EBITDA of $8 million on revenues of $95 million. Gibson guitar revenues for the 12 months ended January 31, 2018 were $122 million, a 10% increase over the $110 million for the same period a year ago.
The financial woes of Gibson's consumer electronics business, which sells headphones, speakers, and a range of accessory products, became critical in early 2017. Due to a 25% drop in revenues, the company had its vendor credit lines trimmed by more than $100 million, significantly reducing its ability to secure inventory. Simultaneously, it lacked the cash to pay the steep costs associated with laying off legacy Philips employees in Asia, Europe, and Latin America. Brian Fox, a partner with the law firm Alvarez & Marshall, who serves as chief restructuring officer, explained, "The company was trapped in a vicious cycle where it lacked the liquidity to buy inventory and drive sales, while at the same time it lacked the liquidity to rationalize its workforce to match its diminished operations."
As finances deteriorated during the course of 2017, Gibson retained investment banker Jefferies Group LLC to develop a reorganization plan. During the course of 2017, Jefferies contacted 57 entities, both financial and strategic, about participating in either a sale or recapitalization of the company. In a court filing, Fox explained, "Financiers who reviewed the company saw the Gibson brand as strong and a great opportunity in the m.i. business. But the challenges of the Gibson Innovation business were too great to commit to a refinancing of the entire company."
Juskiewicz said of the bankruptcy proceedings, "Importantly, this process will be virtually invisible to customers, all of whom can continue to rely on Gibson to provide unparalleled products and customer service. Over the past 12 months, we have made substantial strides through an operational restructuring. We have sold non-core brands, increased earnings, and reduced working capital demands. The decision to re-focus on our core business, musical instruments, combined with the significant support from our noteholders, we believe will ensure the company's long-term stability and financial health."
