Chapter 11 for Tower

UPDATE: On Monday, February 9, Tower Records, Inc. filed for Chapter 11 bankruptcy protection at the US Bankruptcy Court in Wilmington, Delaware. Industry observers had predicted the move in the weeks leading up to the filing. MTS, Inc., as the company is officially known, listed "more than $100 million of assets and more than $100 million of debts in its filing," according to a report from Reuters news service. "MTS expects to emerge from Chapter 11 within 45 to 60 days. It plans to swap $110 million of senior debt for $30 million of new senior notes and an 85% equity stake. Existing equity holders would retain a 15% stake," the report continued.

$100 million in debtor-in-possession financing from CIT Group/Business Credit Inc. will keep Tower Records' 93 operating stores afloat during the reorganization. The Chapter 11 filing will "provide the greatest recovery for our bondholders," said the company's chief executive E. Allen Rodriguez.

Below is the background on this development, posted February 9:

Tower Records may soon file for bankruptcy protection, according to a February 6 report in The Sacramento Bee, the California state capital's metropolitan newspaper.

The West Sacramento–based retailer had been fishing for a bailout since last spring, when it failed to make a scheduled $5.2 million interest payment on a $110 million bond debt. Having come up empty, the 44-year-old record chain had only one alternative: a Chapter 11 filing that would restructure its debt, take control of the company from the founding Solomon family, and make Tower more attractive to future buyers. Most of the company's creditors are said to have already approved what Bee staff writer Dale Kasler termed a "pre-packaged" bankruptcy filing.

One likely outcome of Chapter 11 protection would be a debt-for-equity deal that would leave bondholders in control of the company, which still operates approximately 100 stores. The day-to-day operations of the stores shouldn't be affected by the bankruptcy, according to sources quoted by Kasler, who mentioned that Tower's business has picked up recently. Such a development would be in keeping with a general trend in the music industry, which is enjoying a 10% surge in sales so far this year compared to 2003, according to a February 5 report from Reuters news service, quoting figures supplied by Nielsen SoundScan, which tracks retail music sales.

Starting from a single store, which opened in 1960, Tower reached a peak of 171 stores worldwide, with annual sales in excess of $1 billion. Tower stores were favorites with music fans because of the company's policy of stocking "deep catalog" —reputedly, at least one copy in every store of every recording available —and because of its enthusiastic and knowledgeable employees. Tower's troubles began in 1998, when mass-market discounters such as Wal-Mart and Best Buy began selling CDs at near-wholesale prices, and when Internet file-sharing and CD burning first became significant alternatives for music fans. Among the most likely buyers of a restructured Tower is Sun Capital Partners, Inc., the Florida-based investment group which last year acquired the Sam Goody record chain from Best Buy.

In other music industry news, legendary producer and record executive Clive Davis will assume the helm at Bertelsmann Music Group's North American operations. The move will be something of a homecoming for the 70-year-old Davis, giving him back control over Arista Records, the label he founded in 1975 and sold to BMG in 1979. Davis most recently served as chairman of the RCA Music Group, whose slide he managed to reverse in only two years. At BMG, he replaces Antonio "L.A." Reid, who was his successor at Arista in 2000 in a management shakeup orchestrated by former BMG chief Strauss Zelnick. Davis, whose discoveries include Janis Joplin, Whitney Houston, and Alicia Keys, is known for having an almost unerring instinct for spotting emerging talents and musical trends.

Incidentally, BMG's much-publicized proposed merger with Sony Music may face tough going with European Union commissioners, who plan to begin an in-depth examination of the issue in mid-February. EU officials received several complaints from major competitors and independent labels about possible market dominance by the partners should the merger win approval. The combined entity would control approximately 24% of the European market for recorded music, and about 26% of the US market, according to the February 6 edition of The Financial Times.