Paulson Steinway Bid Music to Shareholders' Ears

People familiar with the matter told The Wall Street Journal that billionaire hedge-fund manager, John Paulson, of Paulson & Co. just made a counter offer for Steinway Musical Instruments Inc. LVB that beats out the one made by buyout firm Kohlberg & Co. in June by $3.

The company would not comment except to say it had received an offer that was better than the $35-a-share bid put up by Kohlberg & Co.

Related: UPDATE: Steinway Receives Superior Proposal of $38.00 Per Share From Un-Named Investment Firm

Under terms of Kohlberg’s agreement with Steinway, the firm has three days to meet or beat the new offer. Steinway said it contacted 64 parties during the 45-day “go-shop” auction period following the original deal with Kohlberg.

Paulson’s $475 million offer set the stage for a potential bidding war, a fact not lost on investors who pushed Steinway shares up better than nine percent Monday, closing at $39.59. Steinway stock is up about 86 percent on the year. The company reported impressive second quarter earnings on improved sales of its varied musical instrument product line.

German immigrant, Henry Engelhard Steinway founded Steinway in 1853 in New York, according to the company’s website. Originally a maker of fine pianos, the company now also manufactures a host of well-known band instrument brands including Bach Stradivarius trumpets, Selmer Paris saxophones, C.G. Conn French horns, Leblanc clarinets, King trombones and Ludwig snare drums.

Bloomberg quoted Albert Fried & Co. strategist, Sachin Shah, who said because of the new offer Kohlberg could raise its bid to as high as $41.

Bradd Kern with California-based Armored Wolf LLC, echoed Shah saying, “There’s a good chance we see another offer, a higher offer from Kohlberg, because there was little incentive for them to provide their best offer on the first round of bidding.” Kern added, “It’s time for Kohlberg to play Beethoven or get off the bench.”

The New York Post, which first broke the story about Paulson, said this offer marked the first time the hedge fund manager had taken the lead on a leveraged buyout.

Paulson is best known for trading securities, having eventually raised his firm’s assets to $36 billion by betting against the subprime housing market in 2007. The company now says it manages about $18 billion.

Meanwhile, CNBC personality, Jim Cramer’s The Street, expressed some reservations, saying the new offer, as well as the one from Kohlberg represent an “enigma.” Noting that Steinway’s piano business is anything but booming, Cramer pointed out that as of June 30, revenue totaling $169.2 million showed only a 3 percent gain over the same period in 2012.

Finally, thanks to ongoing cuts to school music programs, Cramer said, the band instrument part of the business actually lost ground, accounting for 40 percent of total sales.

At the time of this writing, Jim Probasco had no position in any mentioned securities.