It is evident that the bidding war for Steinway Musical Instruments (LVB) is now heating up and the belief of many investors that somebody else would step in to thwart the Kohlberg Kravis & Roberts' (KKR) bid has now come true. The most recent announcement reveals that privately held investment firm Paulson & Company had decided to increase the offer price from KKR by more than 10%. Under the new deal, Paulson will offer $38 per share in cash to Steinway shareholders compared to the KKR offer of $35 per share, which has a value of just under $480 million. At Steinway's current trading price of $39.60, the new offer is at a discount of more than 3% and it is not inconceivable another bidder may show up at the last moment. The Paulson proposal is generally regarded as the better offer and must be regarded as the favorite because of the tight deadline that Steinway has imposed on its "shopping period," which leaves other possible acquirers little time in which to respond. Paulson, whose deal values Steinway at $40 a share, is reported by Bloomberg to have beaten another last-minute bidder, South Korea's Samick Musical Instruments.
The important players in the business
There are not many publicly traded manufacturers of musical instruments and Steinway is among the leading ones, along with Kimball International (KBALB). Steinway concentrates on producing traditional instruments like its world renowned grand pianos, baby grand pianos and stand-up pianos. Since Steinway has its own niche and fan following, it has been able to maintain high margins. It is, however, being challenged by the shrinking cost of electric instruments that sound just like the real thing and the changes in the tastes of consumers, forcing it to compromise. On the other hand, Kimball is more technologically savvy and manufactures electric instruments like keyboards, guitars and recorders. Both companies must now deal with lower cost global competitors such as the likes of Yamaha of Japan. Both Steinway and Kimball are almost the same size and the former has a post-offer market cap of $493 million and an enterprise value of about $413 million, Kimball has a market capitalization of $428 million and a book value of $324 million., Steinway earned $33.4 million on revenues of around $359 million while Kimball earned around $20 million on revenues of $1.2 billion in the previous year. Clearly, Steinway is more profitable and the better pick and this advantage is reinforced by its strong cash to debt position.
What does Steinway have to offer?
Since Steinway is an old-fashioned traditional company that uses old-fashioned technology, it is interesting to see what it can offer potential acquirers. Steinway's pianos are expensive at more than $200,000 apiece, accounting for approximately half the revenues. Demand continues to be strong and despite a 3.5% annual price increase, the company sold 33% more pianos in North America and 20% more in Europe. The disappointment in Asia can be attributed to unfavorable exchange rates and overall, revenues from pianos increased by 13%. The interest in the company can also be attributed to the increased interest in the high end luxury market. Moreover, there are significant barriers to entry when you consider the century of expertise that the company has built and the value of its brand name.
What happens now
The Paulson offer has in theory reopened the possibility of arbitrage and, though it presently has the upper hand, the entry of another bidder could throw the whole situation open again. Remember that the "shopping period" restrictions apply only to KKR and not to any other bidders. Neither of the current bidders have any obvious synergies with Steinway and we could well see a higher bid from a company that actually has the synergies.
The bottom line
There is no prospect of any arbitrage profits on the Paulson offer and only new bidders offering a premium to the current market price could create the possibility.