Steinway Musical Instruments Inc. agreed to be acquired by Paulson & Co., the hedge fund owned by billionaire John Paulson, in a deal valuing the 160-year-old piano maker at about $512 million.

The offer for $40 a share tops that of private-equity firm Kohlberg & Co., which had bid $35 a share last month for Waltham, Mass.-based Steinway. Kohlberg withdrew its bid yesterday after disclosing a rival bid of $38 a share said to be from Paulson. Steinway’s board recommended that all shareholders tender their shares to the new offer, according to a statement today.

Steinway, whose pianos can take almost one year to make, disclosed Kohlberg’s bid of about $438 million on July 1 and said at that time it would conduct a 45-day go-shop period where it could seek another suitor. Today’s deal was announced as that deadline was set to expire and the bump in Paulson’s offer may indicate a third party was involved, said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co.

“The fact that they went from $38 to $40, implies that somebody did submit an offer,” Shah said in a phone interview. “Paulson can complete this transaction, they feel confident, their board has done their due diligence, that’s a conversation I’ve had with them.”

Steinway disclosed Kohlberg’s offer three days after it closed the $46.3 million sale of its stake in the famed Steinway Hall building on West 57th Street in New York City, which houses its flagship retail showroom. The company has ended its agreement with Kohlberg and will pay a termination fee of about $6.7 million, according to today’s statement.

German Immigrant

The piano maker that gave the company its name was founded in 1853 by German immigrant Henry Engelhard Steinway in a Manhattan loft on Varick Street, and over the following decades became a brand recognized worldwide.

The company was bought by saxophone maker Selmer Industries in 1995 and taken public the following year by investment bankers Kyle Kirkland and Dana Messina, then chairman and chief executive officer, respectively. They expanded through acquisitions and faced declines in sales during the recession. In 2011, the executives made a bid to buy the band division -- which includes Bach Stradivarius trumpets and C.G. Conn French horns. Steinway turned down the offer and ended a review for strategic alternatives in December.

“At $5 per share more than the offer from Kohlberg, this transaction provides shareholders significant additional value for their investment,” Michael Sweeney, Steinway’s chief executive officer, said in the 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.”

Steinway rose 5.3 percent to $40.30 at 8:53 a.m. in New York and had gained 81 percent this year through yesterday’s close. Once the deal closes Steinway will become a private company.

For more coverage on Steinway, see "Piano Manufacturer Pops Poison Pill" and "Steinway’s CEO Steps Down."

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