The proposed acquisition of Guitar Center Inc. by Bain Capital Partners will give shareholders a 26 percent premium over the share’s previous trading price.
That’s not good enough for some. Two lawsuits allege that the sale shortchanges shareholders.
The current deal values Guitar Center, based in Westlake Village, at $1.9 billion, plus the assumption of $200 million in debt. The company expects to complete the transaction by the end of the year.
But Philadelphia attorney Brian Felgoise has filed a suit with the Delaware Chancery Court against “certain officers and directors” of the company. “The goal of the lawsuit is to seek the highest possible offer for the public shares,” according to an announcement by Felgoise’s office. Repeated calls for explanation from Felgoise were not returned.
Meanwhile, an individual investor, Mary Benton, has filed another suit in Delaware accusing the board of failing to seek other bids and “conducting an inadequate and unfair sale process.” Moreover, the board has signed a definitive agreement with Bain that includes provisions to discourage open competition for the Guitar Center, such as a $58 million break-up fee if the company accepts another offer.
At first glance, a 26 percent premium would appear a good deal for stockholders, unless Guitar Center was on the cusp of a major expansion and the announcement of the buy-out by Chairman Marty Albertson points to that very possibility. Albertson called the privatization “a strong validation of the company’s accomplishments over the years as well as our future growth prospects.”
According to a recent presentation at an investment conference, the company has produced compounded annual revenue growth of 17.5 percent during the 2000-2005 period. The number of stores grew from 75 to more than 150.
The two drivers of that growth look likely to continue in the future. First, Internet sales have grown at a healthy pace since the company’s acquisition of the Musician’s Friend e-commerce site in 1999. The company reports that the site has 50 million unique visits per year.
Second, the investor presentation outlined a strategy to move Guitar Centers away from guitars and into the school musical instrument rental market. Eventually, the company expects its store count to top out at around 400, up from 210 at present.
As for the legal assertion that managers and directors abused their position at the expense of stockholders, Guitar Center executives are also major stockholders in the company. According to proxy statements filed with the Securities and Exchange Commission, the top 15 managers can expect a paycheck of $60.4 million if the acquisition goes through. Albertson would be the main beneficiary, exchanging nearly 650,000 shares for more than $40 million. In addition, Guitar Center has an employee stock ownership plan which would be cashed out when the deal closes, according to the company.
“We don’t anticipate changes to our business strategies and plans,” stated Albertson in a special proxy filing in connection with the buy-out. “I will remain Chairman and CEO, and we plan for all executive management to remain in their current positions.”
On Wall Street, the smart money seems to believe the deal will occur with little resistance. The stock continues to trade slightly below the $60 mark where it has hovered since the deal was announced on June 27.
“Guitar Center’s stock is now trading at just a 5 percent discount to the acquisition price,” wrote Sharon Zackfia and Tania Bykkonen, analysts at William Blair & Co. in a note to investors on June 28. “We see no reason to believe the acquisition will not be consummated as planned.”
