Trans World to buy Sun’s Musicland assets

Trans World Entertainment has agreed to buy Sun Capital portfolio company Musicland out of bankruptcy. The company’s stay in Chapter 11 has reportedly been tainted by allegations of impropriety.

Publicly held Trans World Entertainment has entered into an agreement to buy Musicland Holding Corp. out of bankruptcy, which would end the entertainment retailer’s troubled stay in the portfolio of Boca Raton, Florida-based Sun Capital.

Sun Capital’s investment in Musicland may be nearing an end, but the company’s unsecured creditors are reportedly crying foul.

While Sun may be in position to recoup at least some of its investment from the sale, the firm may be in some hot water related to “breaches of fiduciary duty” that allegedly occurred just prior to Musicland’s being placed under bankruptcy protection. Dow Jones reported last week that Musicland’s committee of unsecured creditors have requested that the court investigate certain actions of Musicland ahead of its bankruptcy filing.

Among the complaints, the committee reportedly wants the court to look into the prepayment of a $25 million loan to Harris Bank just prior the company’s entering Chapter 11. Sun Capital had guaranteed the Harris Bank loan and stood to lose out on additional capital if the loan was not paid back, according to the Dow Jones story.

Sun Capital spokesman Richard Hurwitz declined to speak with PEO for this article, citing that the firm was in a quiet period related to its fundraising activities.

Sun originally acquired Musicland from Best Buy in June 2003, in a deal that required no cash consideration upon execution. The firm did, however, secure a $200 million credit facility in August of that year, according to a Sun Capital press release, and the firm contributed $50 million to the facility. Congress Financial and Fleet Retail Group led the financing, which was secured against Musicland’s inventory and other assets.

Musicland, last October, retained Duff & Phelps to round up an additional $50 million of equity, half of which Sun would cover. That effort, however, reportedly fell through, and the company filed for bankruptcy in January.

Trans World is reportedly prepared to pay $104 million for Musicland, but the assets are still subject to a competitive bidding process, due to bankruptcy rules.

Commenting on the Trans World bid, Michael Madden, the president and CEO of Musicland, noted that he believes “a sale to Trans World is in the best interests of our associates, creditors, suppliers and customers”.

Trans World competes against Musicland, and runs entertainment retailers operating most prominently under the FYE, Coconuts and Strawberries banners.

In the same week of Musicland’s bankruptcy, Sun Capital also had to cope with the bankruptcy of retail distribution company BMK Inc., which was acquired by the firm in the summer of 2002. Unlike Musicland, however, BMK filed for Chapter 7 liquidation, according to reports.