IPO Preview: Fender Musical Instruments

| About: Fender Musical (FNDR)
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Based in Scottsdale, AZ, Fender Musical Instruments (FNDR) scheduled a $100 million IPO with a market capitalization of $369 million at a price range mid-point of $14, for Friday, July 20, 2012.

Five other IPOs scheduled for this week. Full IPO calendar here.

[S-1] filed July 10, 2012

Manager, Joint Managers: J.P. Morgan; William Blair.

Number 1 in terms of market share for its market, FNDR is an iconic musical brand with loyal dedicated customers.

Some of FNDR's customers may buy the stock just because they want to own part of Fender Musical Instruments.

Update: July 17th. Looks like there's not enough Fender enthusiasts to make the IPO pop Music IPOs Lose Their Beat.

Fender wants to IPO at a premium to Harman International, in terms of price-to-sales, price-to-earnings and price-to book value.

Fender can do that because the Fender brand is well known , Fender is the number one company in its particular segment, and FNDR is an iconic brand with a loyal customer base.

FNDR, however, does have a relative high debt burden. 64% of operating earnings for the March 2012 quarter went to pay interest on debt.



12 months ended March '12

Cap (MM)





Profit %

Fender Musical







Harman Intern'l (HAR)*







*HAR earnings multiple excludes $119mm income tax benefit      

IPOdesktop is neutral to buy for FNDR on the IPO. FNDR seems appropriately priced, but may show a small IPO increase based on a loyal following in the market segment, especially if it is priced under range.

2% "Directed share program"
"The underwriters have reserved for sale, at the initial public offering price, up to approximately 535,714 shares of FNDR common stock being offered for sale to certain of our suppliers, business partners, customers, distributors, holders of more than 5% of our capital stock and artists with whom FNDR has relationships, as well as some of FNDR's officers, directors and employees and certain of their family members"

That means FNDR expects to IPO price to increase somewhat, which is a small positive, because FNDR management won't want to hurt its 'friends' on the IPO.

FNDR is a leading, global musical instruments company whose portfolio of music lifestyle brands brings the passion of music to life.
Since the founding of the predecessor company by Leo Fender in 1946, FNDR has built a comprehensive portfolio of brands led by the iconic Fender brand and other brands such as Squier, Jackson, Guild, Ovation and Latin Percussion, which FNDR owns, and Gretsch, EVH (Eddie Van Halen) and Takamine, for which FNDR has the licensee.

FNDR believes that the Fender brand in particular is closely associated with the birth of rock 'n roll and has a strong legacy in music and in popular culture.

FNDR operates in the global musical instruments and accessories industry, which generated $15.8 billion in global retail sales and $6.4 billion in U.S. retail sales in 2010, according to the December 2011 edition of Music Trades magazine.

The musical instruments and accessories industry generated approximately $6.6 billion in U.S. retail sales in 2011, according to the April 2012 edition of Music Trades magazine. The categories of retail musical products that FNDR addresses, including fretted instruments, instrument amplifiers, percussion products and general accessories, generated an estimated $5.0 billion in U.S retail sales in 2011, according to the April 2012 edition of Music Trades magazine.

In 2011, FNDR had the #1 market share by revenue in the United States in electric, acoustic and bass guitars and electric and bass guitar amplifiers, according to data provided by MI Sales Trak as of December 2011.

In addition, since the acquisition of Kaman Music Corporation (now known as KMC Musicorp), or KMC, in 2007, FNDR believes it has been one of the largest independent distributors of musical instrument accessories in the United States.

FNDR's broad product portfolio includes fretted instruments (comprised of electric, acoustic and bass guitars, banjos, ukuleles, mandolins and resonator guitars), guitar amplifiers, percussion instruments and accessories.

FNDR distributes its products globally in over 85 countries through what FNDR believes to be one of the largest direct-to-retail sales forces in the musical instruments industry in the United States, Canada, Europe and Mexico, as well as through a network of distributors in selected international markets.

FNDR sells its products through independent and national music retailers, mass merchants, online and catalog retailers and third-party distributors.

In fiscal 2011, FNDR generated 58.7% of gross sales before discounts and allowances from the independent channel (representing over 13,000 independently-owned music stores), 23.5% collectively from the national channel, mass merchants and online and catalog retailers, and 17.8% from third-party distributors.

Expand product offerings
Over the last two years, FNDR increased the pace of new products introductions. A recent example is the Fender Select line of hand-crafted production guitars, which FNDR introduced in January 2012 and which utilizes premium materials and are priced at a higher price point than FNDR's standard line of Fender guitars.

International growth
FNDR intends to extend its reach to a broader global consumer base that might not otherwise be exposed to FNDR products.

Gross sales before discounts and allowances in markets outside of the United States grew from $81.5 million in fiscal 2001 to $329.7 million in fiscal 2011.

Expand licensing and co-branding activities
FNDR believes that licensing utrademarks such as Fender and others builds awareness of FNDR brands and furthers a strategy of reaching new consumers, while developing additional relationships with existing consumers through new products.

FNDR is subject to a variety of customs and import regulations that, if not properly followed could delay or impact importation of raw materials.

For example, in June 2011, German officials began a criminal investigation pertaining to less than 500 Fender guitars containing Brazilian rosewood fingerboards to determine if they were improperly imported into Germany between March 2010 and January 2011. FNDR is investigating whether the necks of the subject products may be replaced with materials that are not subject to the import restriction at issue.

One of FNDR's competitors, Gibson Guitar Corp., is in litigation with the U.S. Fish & Wildlife Service, or Fish & Wildlife, for alleged violations of the Lacey Act, which regulates trade in wood and other plant products.

Most recently in August 2011, Fish & Wildlife raided Gibson's headquarters and seized rosewood from India, alleging that it was exported under an incorrect tariff code and that Gibson was not identified in importation paperwork.

Although FNDR believes its sourcing and importation practices are in compliance with the Lacey Act and other applicable regulations, Fish & Wildlife or other applicable regulators could take a different view, which could restrict or prevent FNDR's use of specific types of woods from specific countries/regions of the world, and/or subject us to fines and other penalties.

As of April 1, 2012, FNDR had 2,787 full-time and part-time employees, 1,555 of whom were employed in the United States. Except in Mexico, none FNDR's employees are represented by a labor union

Weston Presidio, 43%
Yamano Music Co., Ltd., 14%
Kanda Shokai Corporation, 13%
William Charles Schultz and Mary Jane Schultz, Trustees of the Bill and Mary Jane Schultz Family Trust, 6%
Servco Pacific Inc., 4.6%

FNDR expects to net $88 million from its IPO from the sale of 7.1 million shares. The proceeds are allocated to pay a portion of FNDR's term debt loan.

FNDR has used credit facility borrowings working capital purposes, capital expenditures and to fund acquisitions of businesses and assets, including the acquisition of KMC.

Shareholders intend to sell 3.6 million shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.