The Wall Street Journal reports that Guitar Center may soon have new owners:
Ares Management LLC, which owns the majority of the music retailer’s debt, is in advanced discussions with Guitar Center owner Bain Capital to take over the company.
Guitar Center has about $1.6 billion in debt, much of it stemming from Bain’s $2.1 billion leveraged buyout of the company in 2007. The company is on the hook for about $144 million in annual debt payments through 2016 and about $150 million total in 2017 and 2018.
Guitar Center reported a net loss of $398.7 million in the quarter ended Sept. 30, compared with a $25.7 million loss a year earlier.
In a leveraged buyout, an investor (like Bain) buys a company by using the assets of the acquired company (Guitar Center) as collateral for loans used to complete the purchase. When a company is over-leveraged, though, it can’t sustain its debt payments and risks bankruptcy.
In Guitar Center’s 2012 Annual 10-K Financial Report (pdf), it warned that “We cannot provide any assurance that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our and Holdings’ indebtedness.”