Maryland music retailer bought in $90M deal

Daily Record, The (Baltimore), Feb 10, 2005 by Kathleen Johnston Jarboe

Guitar Center Inc. yesterday said it would pay $90 million to acquire Frederick-based Music & Arts Center Inc. in a move to create one of the largest beginner musician retailers in the country.

We continue to believe that extending our reach to also serve the beginner musical customer is an important component of our long term success, said Guitar Center Chief Executive Marty P. Albertson during a conference call yesterday.

The country's top rock instrument retailer already specializes in selling guitars, amplifiers, keyboards and audio equipment to professional musicians and hobbyists through its Guitar Center stores and Musician's Friend division. It counts musicians like Eric Clapton, Carlos Santana and Chuck Berry among its clientele.

But the purchase of Music & Arts Center would bolster the Westlake Village, Calif., company's presence in the market for young or beginning musicians.

We're looking for that cradle-to-grave approach, said Bruce Ross, chief financial officer at Guitar Center.

A Music & Arts Center representative declined to comment on the deal.

The purchase comes as the music industry has encountered new growth and entrepreneurship, according to Guitar Center executives. The advent of the Internet and cheaper recording equipment have given musicians an opportunity to pursue their careers without the backing of a big-label record company.

Under the company's plans, the Frederick business would merge with Guitar Center's 2001 purchase of American Music to make the unit one of the largest players in the beginner-musician market.

The combined stores would retain the Music & Arts Center name. And operations at American Music's corporate headquarters in Syracuse, N.Y., would largely shift to Frederick.

The new unit would retain Music & Arts CEO Kenny O'Brien to head the division. His father founded the music lesson and retail business in 1952. American Music's chief financial officer would also lead the new company, retaining the CFO role.

Guitar Center executives praised the Frederick company's merchandise and lesson mix that allowed it to reap about $80 million in revenues for the fiscal year ended Jan. 31. The California company plans to mimic Music & Arts' emphasis on sheet music and other inventory mixes to boost earnings at its American Music stores. The chain, which specializes in band instrument rentals, has struggled to turn a profit since the acquisition, according to analysts.

But Guitar Center executives said the Music & Arts purchase would turn around the unit's lagging profits and be accretive to earnings in 2005, after discounting one-time costs for the acquisition.

During the conference call, one analyst expressed doubts about moving into a market largely supported by public school spending. Many schools have slashed arts budgets as they have grappled with fiscal constraints.

Guitar Center executives said such cuts varied state to state and they felt confident in moving forward with the purchase.

Shares in the company climbed 2.9 percent yesterday to close at $ 58.92 as the business also reported fourth quarter earnings that beat previous guidance. Guitar Center had earnings of 95 cents per share for the quarter. The company previously had forecast earnings in the range of 88 cents to 92 cents per share.

On top of the $90 million price tag, Guitar Center also will assume about $8 million of debt from the Maryland company.

A Los Angeles analyst said the price was hard to evaluate, but estimated Guitar Center paid a slight premium for Music & Arts Center. The Maryland company said it would not release more detailed financial information until the deal closed during the second quarter.

Guitar Center plans to turn the Music and Arts Center locations into a 400- to 500-store network over the next five to 10 years, according to executives. Music and Arts Center now has 62 stores while American Music has just 12 retail locations.

The California company has more than $101 million in cash and securities in the bank, and recently grew its credit line to $150 million to prepare for the growth.

It sounds like it is going to be a big positive, a big win for both companies, said Joan L. Storms, an analyst with Wedbush Morgan Securities Inc. in Los Angeles.