Paulson Agrees to Buy Steinway for $512 Million

The hedge fund Paulson & Company is playing a duet with the maker of Steinway & Sons pianos.

Paulson, in a rare foray into private equity, has agreed to buy Steinway Musical Instruments for $40 a share, or about $512 million, in cash, the company announced on Wednesday. That means that Kohlberg & Company, which previously agreed to buy Steinway, will be watching from the orchestra seats.

Shares of Steinway rose nearly 4.7 percent in trading before the market opened on Wednesday to pennies above $40 a share. The stock closed at $38.27 on Tuesday.

The offer announced on Wednesday caps a flurry of activity over Steinway this week. It is an improvement over an earlier bid of $38 a share that, according to a person briefed on the matter, also came from Paulson.

After that $38-a-share bid was submitted, Kohlberg, which originally offered $35 a share, said Tuesday that it would not raise its offer.

Now, Steinway’s board is recommending that investors tender their shares in Paulson’s offer, which is scheduled to begin within five business days and remain open for at least 20 business days.

“At $5.00 per share more than the offer from Kohlberg, this transaction provides shareholders significant additional value for their investment,” Michael Sweeney, the chairman and chief executive of Steinway, said in a statement. “At the same time, our employees, dealers, artists, and customers can rest assured that Steinway will be in excellent hands under John Paulson’s stewardship.”

The new agreement with Paulson does not provide for a “go-shop” period for inviting rival bids, but Steinway can respond to certain unsolicited offers and could accept a better proposal if one arises during period of the tender offer.

“The company’s proven business model and highly skilled employees provide a strong foundation on which to expand,” John A. Paulson, the president of Paulson & Company, said in a statement. “We fully intend to maintain the superb quality of Steinway’s musical instruments, which are the finest in the world.”

The new deal is a comedown for Kohlberg. One of the firm’s partners, Christopher W. Anderson, told The New York Times in July that he “grew up playing on a Steinway.” He said in a letter to Steinway’s dealers that he intended to “preserve and support everything that makes a Steinway piano special.”

Now, instead of a piano maker, Kohlberg is getting a $6.7 million termination fee.

Founded in 1853 by Henry Engelhard Steinway and his three sons, Steinway makes pianos, horns and other instruments that are used by professionals and amateurs alike. The company is something of a New York icon, with factories in Hamburg, Germany and Astoria, Queens, though its corporate headquarters are in Waltham, Mass.

The deal with Paulson is expected to close in September, Steinway said on Wednesday. It provides for a termination fee of $13.4 million.

Steinway is receiving financial advice from Allen & Company and legal advice from Skadden, Arps, Slate, Meagher & Flom and Gibson, Dunn & Crutcher.

Paulson’s legal advisor is Akin Gump Strauss Hauer & Feld.