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  • Steinway Musical Instruments (LVB): Strong Brand, Hidden Value, Multiple Catalysts 1 comment
    Sep 9, 2012 3:13 PM | about stocks: LVB

    *This article is an abridged version of the one originally posted on For full analysis, please visit the site.

    Steinway Musical Instruments (NYSE:LVB) has many of the attractive elements I look for in an investment: a dominant market position in its core business, solid downside protection, hidden asset value, smart and incentivized insiders, and several foreseeable catalysts all rolled into a small-cap, underfollowed stock. I believe this $25 stock is worth ~$47 (88% upside) and that there are several probable catalysts (as early as Q3 this year) that could drive the share price closer to my estimate of intrinsic value.

    Since its founding in 1853, Steinway has dominated the high margin, high ticket ($130,000+) concert piano market by making the finest pianos in the world. They also have a "band business" which sells non-piano instruments, which is a less lucrative, more commoditized business. Finally, they own two properties in NYC that are listed on the balance sheet at ~$3 mm and $26 mm, but were appraised at $200 mm and $100 mm respectively during a debt refinancing in 2006. This stock has always traded at a discount to the sum of the parts because the company formerly had a dual class share structure that prevented activism. With management that did not have the urgency, willingness, or experience to realize the full value of their assets (particularly their real estate assets), a discount to the sum of the parts was appropriate.

    However, in 2007, ValueAct Capital began building a significant position in the stock. ValueAct is a very successful activist hedge fund that has averaged ~13.5% returns since 2000 (versus an almost flat S&P). Their process typically entails building a large position in a stock, divesting non-core assets, and ultimately, negotiating sale of the business. Just in the last year, ValueAct successfully sold BigBand Networks to ARRIS Group (Nasdaq: ARRS), Immucor to TPG Capital, and S1 Corp to ACI Worldwide (Nasdaq: ACIW). ValueAct has been involved with Steinway since 2007 and it appears this investment is following their typical script. Current investors have an opportunity to invest at a lower cost basis right before several key catalysts, which should drive a tremendous IRR.

    On June 2, 2011 ValueAct along with Samick Instruments, a Korean instrument company, purchased the Class A voting shares from the former CEO and Chairman of the board at $56/share, which was a 100%+ premium to the common share stock price at the time. As part of this process, ValueAct and Samick took control of the company and board, placing Private Equity veteran, Michael Sweeney, as Chairman and CEO. ValueAct currently owns 9.6% of the stock and Samick, which is a Korean instruments company, owns 32.31%.

    The stock currently trades at $25, which is roughly the same price as in June 2011 prior to elimination of the dual class share structure. I believe that this discount is no longer warranted, especially given the high probability of multiple value driving catalysts over the next year. These potential catalysts include:

    A sale of the lower-margin band business, which would allow them to focus all of their efforts on their dominant Steinway brand and other piano operations. The company reached a tentative deal with Kyle Kirkland and Dana Messina, the two former directors who had previously owned the voting rights. While negotiations are still ongoing, the company was reportedly seeking around $76 mm for this division.

    FOR THE REST OF THE ARTICLE, please go here:

    Disclosure: I am long LVB.

    Stocks: LVB
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  • jrnpanther
    , contributor
    Comments (90) | Send Message
    Thanks Connor, your analysis was right on the money. Today's buyout offer was IMO a low ball bid by Kohlberg & Co. They may be able to squeeze a few extra dollars out of Kohlberg before this game is over, but who knows. It's my guess that the current insiders will not tender their stock at this time. They will IMO be looking to unload when Kohlberg unloads in a couple of years.
    1 Jul 2013, 01:39 PM Reply Like
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