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Paulson Pulls Buffett-Like Move in Steinway Acquisition

NEW YORK ( TheStreet) -- John Paulson's hedge fund Paulson & Co is buying famed piano maker Steinway Musical Instruments (LVB) for $40 a share, in a deal that is reminiscent of the merger and acquisition activity of Warren Buffett-run Berkshire Hathaway (BRK.A).

In buying Steinway, Paulson & Co. is making a bet on a manufacturer of high-end pianos with a history and brand that makes it "moated" from competitors or new entrants to the market. Ninety nine percent of all concert pianists chose Steinway pianos in 2007, the company says on its Web site.

The deal also appears to be an investment in trend such as the rise of mass affluence globally. Many Steinway grand pianos cost in excess of $50,000 on second-hand markets. Paulson & Co. said it will also look to expand Steinway's operations, while retaining the company's renowned quality.

"Steinway has a 160-year history of manufacturing the highest quality pianos and musical instruments. The Company's proven business model and highly skilled employees provide a strong foundation on which to expand," John Paulson said in a statement. "We fully intend to maintain the superb quality of Steinway's musical instruments, which are the finest in the world."

For John Paulson, the acquisition of a publicly traded company is a departure from the hedge funder's investing roots in merger arbitrage.

Often, Paulson & Co. makes large bets on consolidating industries and firms, in so-called merger arbitrage investments that pay off when acquisitions are announced or completed. Recently, Paulson & Co. has made big profits from a consolidation of the wireless industry as also-ran carriers such as Sprint (S), MetroPCS and Leap Wireless (LEAP) cut takeover deals with strategic acquirers.

Wednesday's announcement of a deal for Steinway, however, is more fitting of Warren Buffett's investing sytle. Buffett is known for acquiring businesses with long histories and brands that are insulated from competitors. Unlike Paulson & Co.'s merger arbitrage expertise, Buffett often advocates a holding period of "forever."

To be seen is whether Steinway is a one-off acquisition for Paulson & Co. or whether the hedge fund is diversifying its investing style.

Wednesday's $40 a share offer values Steinway at about $512 million and trumps an initial $35 a share offer from private equity firm Kohlberg & Company made in July. Steinway's board now unanimously supports the Paulson & Co. offer. Kohlberg has withdrawn its offer and is due to receive a termination fee of approximately $6.7 million.

"[Our] employees, dealers, artists, and customers can rest assured that Steinway will be in excellent hands under John Paulson's stewardship. He shares the Company's commitment to the musical community and embraces our strategies to fully leverage our premier brands and extend our market leadership," Michael Sweeney, Chairman and CEO of Steinway, said in a press release.

Steinway shares have risen over 80% year-to-date amid a CEO change, the sale of its real estate assets and competing takeover bids. In March, the company sold a stake in Steinway Hall on West 57th Street in New York City for $46 million.

In 2012, Steinway revenue grew to $353 million, while its earnings rose to over $13 million. In mid-June, the company said it would redeem $68 million in its outstanding debt.

Steinway & Sons was founded in by Henry Engelhard Steinway and his three sons in 1853 in a Manhattan loft on Varick Street. The company has factories in Hamburg and New York, as well as subsidiaries in Berlin, London, Tokyo, and Shanghai. It crafts approximately 2,500 pianos a year worldwide, Steinway says on its Web site.

The company's products also include Boston and Essex pianos, Selmer Paris saxophones, Bach Stradivarius trumpets, C.G. Conn French horns, King trombones, and Ludwig snare drums.

Boutique investment bank Allen & Company is serving as financial adviser to Steinway in its buyout. Skadden, Arps, Slate, Meagher & Flom and Gibson, Dunn & Crutcher are acting as legal advisors to Steinway, while Akin Gump Strauss Hauer & Feld is acting as Paulson's legal advisor.

-- Written by Antoine Gara in New York.

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