Why Did Fender Pull Its IPO?
The date was marked, the offer price was set, and the ticker symbol was chosen, but that did not stop Fender Musical Instruments from pulling its initial public offering earlier this month. Despite the troubles of Facebook (NASDAQ: FB)’s IPO, this move came as a surprise to most investors, as we’ve recently seen a number of successful transitions to the secondary markets (here’s our Top 3 hottest examples). In Fender’s case, there are a number of reasons why it decided to prevent you from having the option to hold shares of FNDR in your portfolio; here are five of them.
1. The present macroeconomic environment is less than ideal. The official explanation given by Fender CEO Larry Thomas was that “current market conditions and concerns about economic conditions in Europe do not support completing an initial public offering at what we believe to be an appropriate valuation at this time.” While this may sound like a cop-out, it is important to note that Fender relies on European consumers to provide more than a quarter of its total sales. With an E.U. youth unemployment rate over 20 percent, the guitar maker’s biggest customer base is being squeezed, literally. Moreover, the advent of dubstep, Skrillex, and electronica has given music-loving teens a cheaper outlet to fulfill their tunage dreams.
2. FNDR may have been overvalued at its offer price. It was speculated that shares of FNDR would have gone on the market at a share price between $13 and $15, meaning that it would trade at a Price-to-Earnings ratio of around 20.0X, and an EV/EBITDA of more than 15.0X. Both of these numbers are above the likes of competitors like Yamaha and Steinway Musical Instruments (NYSE: LVB), and are not warranted for a company as mature as Fender, which brings us to our next point.
3. As a mature company, Fender would not provide high growth post-IPO. In today’s world of hot and fast tech IPOs, Fender would not have sported the 15 to 20 percent returns that companies like Kayak Software (NASDAQ: KYAK) and ServiceNow (NYSE: NOW) have generated in their first week of trading.
4. The guitar maker also holds a large amount of debt. Fender currently has a “negative” ratings outlook from Moody’s, and holds roughly $260 million in debt outstanding. A significant chuck – $117 million to be exact – was used to acquire Kaman Music, a move that has yielded sparse value to Fender’s financial health. Specifically, revenues have actually shrunk post-recession, falling from $712 million in 2008 to $700 million last year. Margins have also been moving in the wrong direction, hitting just 3 percent (net) last year, much lower than the industry average of 9.3 percent.
5. Fender relies on Guitar Center for one-sixth of its sales. Last but certainly not least, Fender is overly dependent on Guitar Center, a music retail chain that does not seem suited for the long haul. Since being purchased by none other than Bain Capital in 2007, Guitar Center has been unprofitable every single year, currently sporting an atrocious Caa2 credit rating from Moody’s. In Fender’s case, this matters because Guitar Center is responsible for selling approximately one-sixth of its guitars each year. If the chain were to ever go under, Fender would be forced to find another large-scale outlet to reach consumers. In the fragmented world of music retail, this would be very difficult to do.
While the pundits may have you believe that we’ll see a Fender IPO in 2013, the issues we’ve discussed show that the company has a lot to fix before going public. In the meantime, you can find more out-of-the-box investment analysis at WealthLift INSIDER; we’ve got your back.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.