Retailer on verge of another Chapter 11.
Tower Records is facing an imminent Chapter 11. That’s a certainty, according to top major-label distribution and financial executives, all speaking on condition of anonymity.
But what kind of filing will it be? A prepackaged Chapter 11 deal with an equity sponsor in tow to take over ownership of the company that also has the blessing of the creditors? A Chapter 11, 363 asset-purchase agreement, with the “stalking horse” bid setting the floor price for other suitors to bid against?
That kind of filing would leave the creditors to fight over the proceeds from the asset sale and wrangle with their emotions about whether they will support a new owner going forward. Or could the filing turn into an outright liquidation?
Most industry executives believe it will be one of the first two options. But as the second week in August came to a close, they were still waiting to see if Tower’s bank—CIT Financial, the senior secured lender—would support the retailer through a Chapter 11 process or force the chain into liquidation.
Tower, which has been up for sale since February, met with CIT Aug. 8, according to label executives, some of whom say that CIT is pushing for a liquidation, but will wait roughly two weeks to close a pending deal with a private equity firm.
All four majors placed the chain on credit hold on the eve of NARM’s annual convention. When word leaked out at the beginning of the event on Aug. 3, most other suppliers followed suit, and that means Tower can only buy product with cash upfront.
“Deep down, the industry is pulling for Tower, but a lot depends on how patient the bank is,” one major-label financial executive says. “If they start sweeping the cash [from Tower stores’ nightly deposit out of the company’s account] and say ‘liquidate,’ then there is nothing we can do.”
Tower Records has already been through one Chapter 11 filing, in March 2004, when a prepackaged, 35-day long process resulted in the retailer becoming majority-owned by a consortium of bondholders.
Label sources trace Tower’s current predicament to shorting one of the majors by about $1 million on July payments, with the promise to pay by Aug. 1. Some time during that period, a deal for an unnamed suitor to acquire Tower fell through, sources say. At around the same time, CEO Allen Rodriguez was replaced by new interim CEO Joe D’Amico from FTI Palladium, a financial consulting firm, after the former’s contract ran out.
Sources say D’Amico’s first move was to stop the $1 million payment. His second? He gave word to all four majors that the chain would not make August product payments, which were due starting Aug. 10. Sources say Tower owes product suppliers approximately $90 million.
Sources suggest that Tower has drawn down the maximum amount available from its $100 million revolving credit facility, supplied by CIT Group/Business Credit.
Now the majors will have to see a signed deal sheet or cash before they agree to work with Tower again.
While the majors awaited word on how the meeting with CIT went, Houlihan Lokey Howard & Zukin was working behind the scenes to bring in an equity sponsor. The Los Angeles-based investment bank had already conducted two rounds of bidding, which yielded two letters of intent to buy the troubled chain, sources say. One of those suitors was said to be HM Capital; the other is unknown.
But the deal broke down when the Tower board apparently told the bidder that it was looking elsewhere for a higher bid. Six weeks later when the board was ready to do a deal, the bidder’s check of the chain’s books revealed Tower was close to insolvent. That prompted that bidder to rescind its offer.
According to sources, that marks the second time the Tower board has had the chain sold, but either turned down the sale or blew the deal. When Tower was up for sale in the summer of 2004, the board reportedly refused a bid for about $180 million in cash and debt.
Since this most recent bid was withdrawn, Tower’s investment bank has been trying to convince that bidder to become an equity sponsor for a prepackaged Chapter 11 filing, sources say. Meanwhile, amid speculation that Trans World Entertainment is already looking at Tower, sources say that’s untrue. However, in the event of a Chapter 11 filing and a subsequent asset sale, Trans World is expected to sit at the table.
Another interested suitor with financial backing from a foreign private equity firm says that group would also come to a bidding party, should it be conducted by the court. In addition, sources say another well-known retail executive backed by a private equity firm also wants to bid on the chain but so far has been kept at bay by Houlihan Lokey.
With all that interest in Tower, executives from two different majors—who were both furious when Tower won the NARM large retailer of the year award—said they would support a Chapter 11 sale despite the pain it would inflict on suppliers.
“Of course I want somebody to get in there and buy the chain,” one major-label distribution president says. “Can you imagine the blow to the industry if Tower Records on Sunset Boulevard became boarded up?”