The final moments of Circuit City

Jan 25, 2009 (Richmond Times-Dispatch - McClatchy-Tribune Information Services via COMTEX) -- CCTYQ | Quote | Chart | News | PowerRating -- They were playing for the highest stakes in Vegas that day.

Two very private firms, aiming to keep Circuit City Stores Inc. in business, were pitching their plans to the bosses of the big electronics manufacturers that supplied the ailing retail chain.

Far from the dazzling lights of the hotel's casino and far from the hype of the annual Consumer Electronics Show, Mexican magnate Ricardo Salinas' Latin American retail chain and California investment fund Golden Gate Capital promised to sink hundreds of millions of dollars into Henrico County-based Circuit City.

During hours-long meetings on Jan. 7 and 8, each asked the suppliers if they would be willing to ship goods and be paid later, the standard practice in retailing.

Vendors, the two potential buyers and Circuit City executives left the meetings feeling that the money -- in the form of payment terms from vendors and equity investment from the buyers -- was there.

But time was of the essence: A court order unsealed the next day in U.S. Bankruptcy Court in Richmond gave them just a week, until Jan. 16, to make a deal.

The meetings in Las Vegas -- and then later the following week in New York City -- were among the last-ditch efforts executives made to sell Circuit City after the nation's No. 2 consumer-electronics retailer filed for bankruptcy protection in early November.

The efforts failed.

On Jan. 16, Bankruptcy Judge Kevin R. Huennekens -- in what he said was one of the hardest decisions he had made in his two years on the bench -- approved the liquidation and shutdown of the Fortune 500 retailer.

The company's demise is one of the largest failures of a U.S. retailer. Nearly 34,000 people across the country will lose their jobs, including about 1,500-plus at the chain's corporate office in western Henrico.

The judge's decision came after Circuit City could not find a buyer or the necessary credit to continue operations. Going-out-of-business sales at the chain's 567 stores are under way and will end on or before March 31.

It wasn't just the survival of Circuit City at stake, though.

A court-appointed committee of unsecured creditors was watching closely -- and its members wondered whether there was a valid deal, with real money on the table.

For them, the stakes were high: They wanted to recover as much of their money as possible.

The 11-member group included six of Circuit City's biggest suppliers, vendors who were owed a total of $298 million at the time the company filed for bankruptcy.

They saw a company that was bleeding cash -- running through $200 million in the first six months of its fiscal year despite borrowing $215 million during the same time.

"The trade creditors, because of their own situations and because of the massive losses of hundreds of millions of dollars [of unpaid bills] . . . were very cautious in their approach," said Jeffrey N. Pomerantz, an attorney with Pachulski Stang Ziehl & Jones LLP who is representing the creditors committee.

The longer Circuit City took to find a buyer, the greater the risk to vendors that they would not be paid in full.

After filing for Chapter 11 bankruptcy on Nov. 10, Circuit City executives knew they had little choice but to put the chain up for sale.

By Thanksgiving, investment bank Rothschild Inc. was circulating a 50-page PowerPoint-like presentation to potential buyers -- what finance executives call a teaser document.

But Circuit City's bankers, a group led by Bank of America, told the creditors committee that they could not fund loans of the size needed to keep a 500-store chain running, Pomerantz said.

Eventually, the banks said the most they could afford was $600 million, said Gregg M. Galardi, a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which is representing Circuit City in its bankruptcy case.

That credit line, which would have been secured by inventory, was less than half of what the banks had given Circuit City before its bankruptcy filing.

With a smaller credit line, the chain would have to shrink.

The Las Vegas meetings show that Circuit City executives wouldn't give up.

The Jan. 7 and 8 meetings at the annual Consumer Electronics Show, where manufacturers meet retailers to show off their latest gadgets and to hammer out multimillion-dollar sales, were key.

Between them, two competing buyers held just less than a dozen meetings with groups of top executives from Circuit City's biggest vendors.

They were very private, very formal meetings. Attending each was up to about a dozen senior executives from the vendors, including the heads of North American operations of giant multinational electronics and computer firms.

Each of the potential buyers started with a sketch of its plans. Vendors fired off questions. The buyers felt them out about payment terms.

"They met with our two buyers and, to the credit of our buyers, at their own expense," Galardi said.

Circuit City walked away from the meetings with letters of support from vendors, "pieces of paper that say 'I will have $400 million of trade vendor support'" -- but "not lawyer letters that say 'I will commit to $100 million of financing,'" Galardi said.

Circuit City thought that was enough.

Company executives began negotiating in earnest with buyers the week of Jan. 12, taking over conference rooms on four floors in their lawyers' Manhattan offices on Times Square.

Circuit City's top executives shuttled by elevator from floor to floor. On one, they huddled with Salinas' representatives. Salinas, who owns Latin America's largest chain of consumer-electronics stores, was Circuit City's largest shareholder, with about 28 percent of outstanding shares in mid-November.

Liquidation specialists camped on two other floors, in case Circuit City could not arrange a deal. Representatives of the creditors committee were on yet another.

The chain's executives were talking with Golden Gate's executives by phone. The San Francisco-based private equity firm owns or invests in a number of businesses, including holding majority stakes in the Express retail chain and Romano's Macaroni Grill restaurants.

But there was confusion about where things stood.

Harvey Yellen, chairman of the liquidation firm Great American Group, said Circuit City told him Jan. 13 that it would not know if it had a buyer until the next day.

James A. Marcum, the retailer's vice chairman and acting president and CEO, was doing everything he could to nail down a deal that would keep Circuit City alive, Yellen said.

Early in the week, the creditors committee heard that Salinas was rethinking his strategy.

But Pomerantz, the committee lawyer, said it had only been in contact with Salinas' representatives on Jan. 5 -- before the Las Vegas meetings -- in a five-minute telephone conversation between lawyers.

"Even during the auction, when we were in the same building for virtually three days," Salinas' representatives did not "come and approach us and say 'this is a plan that could work,'" Pomerantz said.

The other buyer, Golden Gate, gave the creditors "an indication of interest that was two pages that, basically, was as vague as could be," Pomerantz said.

He said that in neither case were the buyers offering enough cash to cover the bills that come first in a bankruptcy -- the administrative expenses, such as lawyers' fees -- which are paid ahead of vendors such as those on the creditors committee.

As the New York talks started, an auction to sell the chain to potential buyers was slated to begin Jan. 13. Circuit City postponed it at least three times as executives kept trying to negotiate a deal.

Circuit City executives and Golden Gate went back and forth by phone until the afternoon of Jan 15. The executives worked with Salinas at the same time.

There were options on the table.

One scenario would have created a 350-store chain. The other -- and seemingly more doable -- was one with 180 stores operating from Richmond to Maine.

But Salinas backed out on Jan. 15, sources familiar with the negotiations say.

One put the time at 10:30 p.m. But another said it was in the morning. Salinas saw "it was much more complicated than he expected it to be."

Pricing on some inventory "was just too high," the source said. "The value and the support [from banks and vendors] just wasn't there."

At 10 p.m. Jan. 15 -- about 12 hours before a scheduled appearance in Bankruptcy Court in Richmond -- came one of the last steps, Yellen said.

At that time, his consortium of liquidation companies was named as the stalking-horse bidder, setting a floor bid to liquidate the company.

The liquidators were putting up $900 million, Yellen said.

There were no other bids.

"Hope springs eternal, but we actually had people that were still interested . . . that sat through the three days that we sat through in those conference rooms, people that said we put $50 million [up] and the committee says 'put it . . . in a nonrefundable account," Galardi, the company's lawyer, said in court. "That's not going to happen when the committee doesn't even want to bet on themselves."

Yellen's representatives and Circuit City signed a liquidation agreement at 12:20 a.m. Jan. 16.

At about 2:45 that afternoon, Huennekens, the bankruptcy judge, approved the liquidation of the company. "It is indeed unfortunate that the debtor finds itself in the situation that it's in today. This is a very sad day for management, for the employees, for the customers and for the community," he said.

Said one source familiar with the negotiations: "I believe in my heart of hearts, and will until the day I die, that there were two motivated buyers -- and one of them was really, really motivated.

"In my view, we could have had a going concern . . . The clock just ticked and time ran out."

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Contact David Ress at (804) 649-6051 or dress@timesdispatch.com.

Contact Louis Llovio at (804) 649-6348 or .

Deputy Business Editor Gregory J. Gilligan contributed to this report.

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