The builder of guitars played by legends like Eric Clapton, Pete Townshend and Jeff Beck is planning to take center stage in an initial public offering of stock in the coming months.
Fender Musical Instruments Corp. on Thursday filed a $200 million IPO registration with the Securities and Exchange Commission; registration amounts are used solely to calculate filing fees, so the final amount it eventually sells could differ. The company hasn't set a price range or date for its deal, but plans to list on the Nasdaq under the symbol FNDR. Most IPOs take about three months to list after registration.
Based in Scottsdale, Arizona, the company was founded by Leo Fender in 1946, and has since gone on to become the No. 1 seller of electric, acoustic and bass guitars, as measured by 2011 revenue. Its brands include the Telecaster and Stratocaster guitars. The company also makes other stringed instruments, such as ukuleles and mandolins, and guitar amplifiers, and percussion instruments. Most of its sales are through independently owned music stores.
In a decidedly corporate twist, Fender's largest current owner is private equity firm Weston Presidio, which holds a 43% stake. The company's preliminary prospectus indicates that some private owners may sell in the IPO, but doesn't specify whether Weston Presidio will be among those sellers.
Fender makes the most of its affiliation with rock and blues royalty, marketing guitars that are imprinted with the signatures of players including Clapton and Beck, and instruments designed with input from players like Stevie Ray Vaughan and Billy Corgan of the Smashing Pumpkins.
For all its profiles of Fender users on its web site, Fender doesn't have the lock on the world's top guitarists. Privately held Gibson Guitar Corp., the designer of the Les Paul model, is a formidable competitor. Townshend, Clapton, Bob Dylan, Jeff Beck, Paul McCartney and Keith Richards have all played Gibson guitars at different points in their careers; Bob Marley was buried with his red Gibson Les Paul.
Fender sees sales growth coming from a broader swath of consumers as improved manufacturing has lowered retail prices, and technology advances — such as a Fender amplifier that incorporates online music-sharing software — have made it easier for people to edit and distribute their music. The company also sees increasing popularity of guitars in emerging markets like China, India and Indonesia.
Net sales in 2011 rose 13% to $701 million as it raised prices and reduced discounts on its products amid improved market conditions, introduced new products, and grew international sales compared to 2010. It reported net income of $19 million in 2011 compared to a net loss of $1.7 million in 2010. A lower gross profit in 2010 weighed on the company's results that year, thanks to a paint supply issue — the main supplier to its California manufacturing plant went out of business — that has since been resolved.
Fender plans to use the proceeds from its offering to repay debt and for general corporate purposes; it could also use the money for acquisitions, though it doesn't have any agreements for any specific purchases right now.
Among the risks Fender faces is that it derives about 27% of its net sales from Europe, which is undergoing a financial crisis. Any economic downturn in its core markets could affect consumer purchases of guitars, which are clearly discretionary items.
Nearly 16% of Fender's net sales are made through Guitar Center, another Weston Presidio-held company. That concentrates some of Fender's accounts receivable credit risk with a company with a poor credit rating; Moody's Investors Service has Guitar Center rated at Caa2, defined as "poor standing and subject to very high credit risk."
Like Gibson, Fender has been scrutinized for the wood it uses in its instruments. In June, German customs officials started an investigation into whether less than 500 Fender guitars with Brazilian rosewood fingerboards were improperly imported into Germany from March 2010 through January 2011.
Fender recalled the guitars from its inventory and from stores pending the outcome of the inquiry. Fender is looking into whether the necks of the guitars may be replaced with other materials, while at the same time seeking a retroactive exemption from the import restrictions.
JP Morgan Chase & Co . and William Blair & Co. are managing Fender's offering.