Anime News

The Final Play for Musicland's Bookselling Media Play Chain
Date: 12/14/2005
The Musicland Group is liquidating its 61-store Media Play chain, which will truncate considerably the estimated $100 million in book sales the chain generates annually.

The liquidation is part of an overall restructuring that also sees the chain asking for relief from product payments from vendors. According to sources, the company is asking trading partners to defer 40%-50% of the chain?s payables for three years, in exchange for either a note or non-convertible preferred stock in the company.

That move would free up about $125 million in working cash. The chain is also seeking rent concessions on leases for 110 unprofitable Sam Goody and Suncoast stores that are coming up for renewal next year. Whatever stores don?t receive rent concessions will be shuttered. Story continues below ?

As it stands, the 900-store Minnetonka, Minn.?based Musicland is expected to lose about $20 million on sales of $1 billion in its current fiscal year. What's more, the Media Play liquidation is expected to cost about $20 million?$25 million, sources say.

While management has reduced losses from a $118 million loss it was projected to lose in its fiscal 2003 to the current level, the company was hoping to crawl to break-even this year.

Musicland declines to comment on the restructuring plan, which is being initiated under the auspices of Sun Capital. An investment fund run by the Boca Raton, Fla.?based financial firm assumed ownership of Musicland from Best Buy in June 2003. Best Buy basically transferred ownership to Sun Capital, which didn?t pay anything, except to agree to assume Musicland?s debt.

Once the Media Play stores are liquidated, Sun Capital will probably file Chapter 11 or Chapter 7 for the Media Play business. But in asking major vendors to forgo product payments, it could trigger an overall company bankruptcy filing if the vendors choose not to support Musicland, sources agree.

Books suppliers are not expected to be hurt by Musicland store closures, other than through a reduction of sales. Two years ago, Musicland switched from buying direct from publishers to relying solely on Ingram as its book supplier. It made that switch because the company needed a supply-chain solution when its ownership was assumed by Sun Capital. The assets that came with the deal didn?t include Musicland?s Franklin, Ind., distribution center.

Musicland first entered the book market when it began opening up its Media Play and On Cue concepts?multimedia stores carrying music, video, books and more-back in 1992. Media Play is a big-box concept, taking in about 45,000 square feet, while On Cue?which were the company?s small-town stores?typically measured about 5,000-6,000 square feet and were located in towns with populations lower than 30,000. The On Cue logo has since been switched to Sam Goody; it is unclear how many of those outlets still carry books.

It?s still too early to tell how vendors will react to the Musicland request for help. Philadelphia law firm Morgan, Lewis & Bockius has been hired to represent the major suppliers in negotiations with Musicland and Sun Capital.

A financial executive at one of the suppliers says, ?Ultimately, people will have to weigh the true dollar value of the ?ask? versus the cost of the liquidation.? In addition to the bottom-line considerations, that executive says he is also keeping in mind revenue, too.

?Look what happened with Wherehouse Entertainment,? he says, in reference to that chain?s Chapter 11 filing in September 2003. ?Wherehouse started out with 400 stores, and when Trans World Entertainment got done cherry-picking their best stores, we wound up with less than 100 Wherehouse stores still open. I don?t think that is a place we want to be now.?

But a senior distribution executive at another major vendor says sales volume is not the only consideration. ?Obviously we would like [Musicland] to stay in business, but if they don?t convince us that they can run the business, [their proposal] will not fly,? he says.

Musicland executives have pointed out that Best Buy was two weeks away from liquidating the chain when Sun Capital assumed ownership. Vendors since have enjoyed more than $1 billion in product purchases by the chain in the last two-and-a-half years, something that will continue during the next three years if the vendors agree to Musicland?s request.

Musicland used a similar strategy in 1997 when it asked for a moratorium on product payments. That time vendors agreed to support the chain, and Musicland management pulled off a successful turnaround.

While most of the Musicland leadership that Sun Capital installed in 2003 is still in place, the chairman/CEO office has lately had a revolving door. Eric Weisman, a well-known industry executive who had been running the chain since August 2003, surprised everyone by resigning in early October. His replacement?Jack Chadsey, a retail executive with no industry background?left before any vendors even had a chance to meet him. With his departure, Musicland president Mike Madden has been named interim CEO.

In response to vendor unrest about Weisman?s departure, Sun Capital announced it had hired Chicago-based investment banking firm Duff & Phelps to help raise $50 million in equity. When Sun Capital assumed ownership of Musicland, it did not put any equity into the company, but merely assumed Musicland?s debt. From the get-go, vendors say Musicland was not properly capitalized. A $25 million equity infusion by Sun Capital in April did little to quell suppliers? uneasiness.

But apparently Musicland?s banks?Congress Financial and Fleet Retail Finance, which supply the chain with a $200 million revolver?do not think $50 million in equity is enough to put the chain on stable ground, thus triggering the more ambitious gambit now undertaken by Sun Capital.

As part of the Duff & Phelps move, Sun Capital committed to putting up half of the cash infusion, which would allow it to retain a two-thirds ownership stake in Musicland if another investor enters the picture.

If the vendors agree to defer payments, Sun Capital will still put in the additional $25 million in equity that it earmarked for the chain. If the financial restructuring is successfully set in motion, Duff & Phelps will proceed with its search for another investor, sources say.
Source: The Book Standard