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Precisely, why I asked.

The 2012 report says:
Band: sales $137m gross profit $35m
Piano: sales $217m gross profit $80m
S&S grand pianos shipped: 2,001
Overall operating expenses: $86m
Net income: $13.5m

The Kohlberg model is install new management to improve processes and cut costs, then increase sales.

I bet they are looking at those $86m operating expenses.

I said it before, this cannot end well.

Didn't the financial picture change a whole lot recently with the sale of Steinway Hall? It must have turned the company into a cash rich one. It is my uneducated belief that purchasers of corporate assets like companies with a lot of cash on hand.

I don't know the specific answer to your question, but I did spend some time going through Steinway's SEC filings for last year, especially the balance sheet and all the footnotes. I was seaching for pockets of unrealized value or anything else that the Sharks would have looked for.

A few items.

1.As was noted, Steinway Hall property was sold recently. This operation had been a drag on profits (going from memory, but minus $4-5 mil/yr. sticks in my head). Its sale immediately removes that drag, plus my recollection is they used the proceeds to pay down just about all of their existing debt.

2. Annual operating profit has been running in the range of $30 mil per year. Without the above losses that will improve. It looks to me like this level of ongoing profitability could easily support $300+ mil of debt at current junk rates.

3. There are some interesting footnotes related to the band instrument division. Most interesting was that they have turned some kind of corner in China and now expect that operation to a)continue its profitability and b) be self-funding for growth. Therefore they are repatriating $15 mil of previously accumulated chinese profit that they no longer think will be needed to fund operations or growth initiatives. My guess is things are going very well for them in China. It would not surprise me if Kolhberg's plan has China at its center, as that's a potential hotbutton that could be used to exite the next buyer.

There may be an angle with previously written down unused tax-loss carry forwards that could be brought back onto the balance sheet with a new owning entity (either Kohlberg or the next buyer). I didn't go back to look at past k-1's for additional detail since I don't really feel competent to analyse this particular issue.

I have no idea what the Kolhberg people really have in mind, so this is all speculative.

I probably should have written "ASKING price" or "LIST price".

No matter, those are the basic variables and if profit is insufficient then the cost structure gets messed with (-:

I remember a presentation from a along time ago when we were setting up for a new product introduction.
A manufacturing engineer put this little equation up on the overhead slide projector;
ORDERS - PRODUCTION = BACK-LOG
Which pleased us all, we WANTED back-log.

His next slide was;
PRODUCTION - ORDERS = SCRAP

His POINT was that he wasn't going to invest in over capacity.
We appreciated that excess capacity leads to "fire sales", heavy discounting and basically a devaluation of the product.

The NEXT generation of product suffers a hangover from all that, i.e. sales are withheld in anticipation of the discounting, but you can't afford to do that every time, or even a second time, so don't get into it a first time.

I am very much inclined to agree with Numerian's analysis of the likely sale economics.

Steinway will be flipped before long.

My wider perspective is "why does anyone care?" The future of Steinway matters only to future buyers (and some dealers). Steinway is unlikely to disappear and quality will improve, remain the same or worsen. For current owners this is a "so what" point and for future owners there are plenty of other choices.

The ownership of a company matters little to consumers. The company is also trivial in US economic terms. In Europe the brand is regarded as German and it would not surprise me to see the European entity being spun off.

AJB,
Interesting the "Teutonic" chauvinism. Steinway would probably never have come into being if they didn't start the modern grand design in the USA. The Continental markets were still structured at the city state level in the mid 1800's. The economy of scale was not available there to support the capital investments needed to reduce per unit costs and improve quality. At that point in time the USA was the fastest growing and largest unified market in the world.

I have always found the use of debt to purchase business's problematic. It seems contrary to true market valuation that credit is granted to the entity being sold for the benefit of the purchaser. Couple this with the money supply being debt linked and you have a recipe for asset bubbles.

I have long thought why don't we expand the money supply in proportion to profits. And this would be direct profits-not profits from leveraged asset trading.

But what do I know-I just fix pianos!

Have you ever gotten a mortgage to buy a home? That's a grant of credit against the collateral of the item being sold (the home) for the benefit of the purchaser (you).

M. Numerian, Thanks for your discussion and explanations.

M. JimF, Thanks for your 'glass half full' perspective. Just because 'I don't see the good' (per above) does not mean I think it must turn out very bad. Instead of the 58th St. Steinway Hall they just sold, they can just rent a U-haul filled with a few candidate pianos, park it in the lot of Lincoln Center or in front of Carnegie Hall and have the pianists select in the back of the truck. Just kidding, they may rent some nice space.

Best regards-

Unfortunately, there are only so many places (colleges, concert halls) that can afford Steinway's exorbitant prices. In today's economy, how many people can really afford near six-figure pianos? Steinways are great, but there are many other manufacturers that provide much more "bang for your buck." Those are the companies that will survive, instead of being sold off to the highest bidder. RIP, Steinway & Sons.

Hello AJB -
One perspective (of several I can think of) is that the quality getting worst means the brand not commanding the same respect, which means the market value of the piano you (AJB, an S&S) own eventually going down. There are plenty of arguably equally great piano's from the '20s here that are worth maintaining and restoring, but are not, because the value of the brand has not been sustained.

Best regards -

People have to live somewhere, that cost's money, either servicing debt or paying rent. So there is a difference between investing and spending. No one has to invest.

Purchasing a business by using the credit worthiness of the purchased entity, (leveraged buyout), to then grant dividends to the new owners is not an efficient use of capital. The creation of great new wealth has always been new businesses supplanting old ones.

Expanding the money supply in response to debt instead of profits rewards leveraging of existing assets. This disrupts equity valuation based on profits and prospects for future increases in them. This undermines rational equity values being created by a stock market. Now we have over half the equity trading being executed by robots-it still takes a human to write the trading algorithms-but that cannot be done at anything like the speed of robot trading.

That's an excellent and concise critique of today's capital markets. Old timers in the leveraged buyout business have gone public with their criticism of the way business is being conducted these days. The investors are not necessarily more or less greedy than in the past, but they are greedy way too early. People don't wait three to five years for their large payout. There are two many cases where six months into the deal the new owner arranges for more debt to be taken on, and then simultaneously declares for themselves a huge dividend payment equal to the amount of the debt proceeds. This is why in 2007 - 2008 there were so many private equity guys "making" $500 million a year from their business. Nobody makes that sort of money in salary, wages, or even as an investor given today's low interest rates and mediocre performance on most investments. But you can make that sort of money through equity extraction - raiding a company's pension plan, or playing games by forcing the company to borrow so you can declare yourself a dividend. As you say, this isn't capitalism because it is certainly not an efficient use of capital.

I suspect Jerome Kohlberg is from the old school and might agree with this criticism. Also, the 57th street property was a classic example of an underutilized asset in the leveraged buyout business. They would have looked at Steinway's insistence on keeping that property as a showroom as nothing but sentimentality, so one key element of a buyout is to force management to get over their sentimentality, dump the showroom, and monetize the asset. In LBO speak, that would be a legitimate cause for then declaring a gigantic dividend for the new owners. A critic could not exactly say this is an efficient use of capital; after all, a shiny new 60 story mixed use condo has now been built in Midtown on prime property. The way in which it is sometimes done, in which disinterested parties force a takeover of the company and pocket the profits from the deal, could at least be described as buccaneer capitalism. In this case, existing management at Steinway seemed to decide either they monetize the property and pocket the profits, or some third party was going to take over the company and take the profit for themselves. Selling Steinway Hall became inevitable once that was set in motion.

Steinway's sales in to institutions is strong, even in this challenging economy. Also, you base your conclusion on sales of Steinway & Sons pianos, leaving out Boston, Essex, and band instruments - all significant contributors to Steinway's income stream.

You ask "...how many people can really afford near six-figure pianos?" Steinway makes only about 4000 pianos per year. There is a huge pool of potential buyers.

Phacke,

I was surprised you characterized my perspective as "glass half full," although I can see how it might read that way.

Truth is, I don't think being LBO'ed is good for the long term health of any business. The LOB crowd does not create value...they just syphon off everything the business has created. Since the value removed is no longer available to maintain the business or support its future growth, the endgame is either it's demise or the injection of new (replacement) capital when it is flipped to the next owners.

Steinway Hall SOLD !!!

Are they talking about this hall ?

That's the one.

Shame on them, then

From an American point of view, this perhaps makes sense.
There are exceptions but not many [left]

From a European view, this is [almost] unthinkable.

When talking to people like Ulrich Sauter, Udo Steingraeber, the Bluethners and even relative newcomers like Paolo Fazioli and Dr.Laul, the "sentimentality" of following their own genius or a long national tradition including that of their own forefathers' is a real one.

It is exactly what motivates them from day to day to do honor and live up to the task. It's something that goes without saying.

It gives their products a certain "authenticity" that is still being appreciated by many in today's market.

It's not just another "asset" that's up for sale - never will.

I'm not an economist but at least to me this makes for a promising, reliable and more "predictable" future overall.

Having grown up in post-war Germany whose economy was 90% shattered, I've seen it work with literally 10,000's of small family owned firms specializing in smaller production, high quality type products.

So, I may be somewhat prejudiced.

Let's see how this one will play out.

Norbert

You should have bought it yourself. Then, as the owner, you'd have been free to keep it as a piano museum or do anything else with it that you wanted.