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Sun to face the music

Sun Capital’s turnaround of Musicland has hit a stumbling block, following news that the music and video retailer filed for bankruptcy protection.

Sun Capital’s investment in Musicland was tripped up after the entertainment retailer announced that it filed for bankruptcy protection.

The Boca Raton, Florida-based Sun had acquired the business in 2003, carving the unit out from Best Buy. The firm initially didn’t put up any equity to gain control of the business, but did take out a $75 million revolver for working capital.

Musicland’s Sam Goody franchise has had trouble in the face of the iPod revolution.

When Sun acquired Musicland, the company was already in need of a turnaround. Best Buy had bought the business in early 2001, paying $696 million for the company, which operates the Sam Goody, Suncoast and Media Play retail outlets. By fiscal 2003, the Musicland division was costing Best Buy roughly $72 million a year in operating losses.

According to reports, Sun’s goal was to address the company’s real-estate portfolio and rein in its expense structure. The firm was also betting that music piracy would abate, and that there was a still a place for a music and video retailer.

Sun reportedly put $25 million into the company in 2004, and in October of last year, Sun hired Duff & Phelps to raise an additional $50 million of capital, half of which Sun would cover. That effort reportedly fell through.

Showing further signs of a cash crunch, in December, Musicland announced that it would close its 61 Media Play retail locations.

“We have been exploring various options for cutting costs, such as the impending closure of the Media Play chain,” Musicland president and CEO Michael Madden said in a statement. “We believe that the decisive action we are taking provides the company with the most effective means to restructure our operations, strengthen our balance sheet and position us to compete more effectively in the current music and movies industry environment”.

Musicland noted that its financial struggles stem from the growth of music downloading as well as increasing pressure from the big box retailers.

Wachovia has already committed to a lead an arrangement for $75 million in debtor-in-possession financing, which will allow the company to operate during the restructuring. Wachovia is an existing lender in the company.

A spokeswoman for Musicland told PEO that the bankruptcy does not automatically preclude Sun Capital from maintaining its stake in the retailer. Calls to Sun’s vice president of communications Richard Hurwitz were not returned.

Kirkland & Ellis is providing legal counsel to the debtor, while FTI Consultants has been hired as an advisor.