Hedgies May Rock Guitar Center

Sageview was started by two ex-KKR partners, so it knows a thing or two about taking companies private. While Sageview hasn't said what it wants to do with Guitar Center, it indicated in the filing that it has had discussions with management and may have more in the future.

It's pretty clear to me what Sageview wants management to do: Don't go into too much debt trying to double or even quadruple the number of stores; rather, take on debt to reduce shares, cut costs and perhaps even go private.

Why go private now? The company has a $1.5 billion enterprise value and cash flow of $180 million, so it trades at a multiple of eight over cash flows and is experiencing growth, albeit not double-digit. In other words, it could take on a lot more debt and comfortably pay it down. This is perfect for an LBO firm looking to help management take it private, even at a premium of up to $50-$55 per share.

Even if the company doesn't go private and doesn't continue to grow at a double-digit pace, it's still cheap compared with other retailers such as Target (TGT Quote), which trades at 19 times earnings, as opposed to Guitar Center's 16, or Circuit City (CC Quote), which trades at 26 times earnings.

The vultures are going to start circling -- I think the time to buy is now.