Unable to find buyer, Circuit City will fold

SLIDESHOW: The rise and fall of Circuit City

Circuit City Stores Inc.'s final days begin today.

A nationwide "everything-must-go-sale" starting today will be the first step to shutting down the chain to try to pay off its bills.

During the next several weeks, the company's Mayland Drive headquarters in western Henrico County virtually will empty out -- the first to leave likely will do so next week.

Yesterday, a federal bankruptcy judge in Richmond approved the company's request to begin liquidating. The sales will end on or before March 31.

Circuit City notified some 1,500 employees in its corporate headquarters that they'd be out of a job in 60 days. The judge's decision means 30,000 employees at its 567 stores will be out of work by late March.

The demise of the chain, which got its start 60 years ago by selling television sets out of a small downtown Richmond storefront, marks the loss of a local Fortune 500 company that was a major contributor to charities as well as a supporter of the area's traditionally strong job market.

The shutdown is another blow to a business community reeling from the pending bankruptcy of two other corporate stalwarts.

Circuit City, the nation's No. 2 consumer electronics chain, became the largest retailer to fall victim to the expanding financial crisis.

Already squeezed for cash when the credit-market crisis hit in the fall, Circuit City couldn't convince creditors it could find a buyer who could keep the long-ailing company alive long enough to pay its IOUs. As of Nov. 30, it owed $2.9 billion.

"We are extremely disappointed by this outcome," said James A. Marcum, vice chairman and acting president and CEO.

"The company had been in continuous negotiations regarding a going-concern transaction," he said. "Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders to structure a going-concern transaction in the limited timeframe available, and so this is the only possible path for our company."

Alan L. Wurtzel, the son of the company's founder and the chain's CEO from 1972 to 1986, said the retailer's demise is a hard blow.

"This is a sad, sad day," he said. "I have never had this experience, but I can imagine this is like losing a child -- something you raised and grew up and 20 years later it got sick and died. This is pretty terrible."

. . .

The company struck a deal with a consortium of four liquidators to sell all the merchandise in its 567 stores after trying to seek a buyer through an auction earlier this week or a deal to refinance its debt.

The four are guaranteeing Circuit City will get 70.5 percent of what it paid for those items. The merchandise is valued at $1.1 billion to $1.3 billion, according to testimony in bankruptcy court yesterday.

The company and the liquidators will split anything above that guarantee, at first on a 70-30 basis between Circuit City and the four. Eventually if the four receive 3 percent of the value of the goods, the split would become 90-10 between Circuit City and the four firms.

Circuit City won't keep the proceeds for long, though. It will go toward paying its obligations.

Headquarters employees should be paid for the next 60 days, and a small group likely will remain to help settle the company's affairs, spokesman Bill Cimino said.

Store employees may or may not be kept on during the liquidation sales, depending on whether the liquidators want their help.

"We worked hard on behalf of our employees, and we worked hard to convince creditors that our customers should be taken care of," said Bruce H. Besanko, the company's chief financial officer.

He said that's why people will be able to use gift cards, at their full value. Returns made on purchases prior to yesterday will be honored, and repairs and servicing will be done as the company winds down, he said.

The liquidators are supposed to leave stores "broom clean," court papers say. They will keep anything that isn't sold.

The liquidators will continue selling warranties administered by a third-party, and existing warranties remain in force, since they are the responsibility of other companies.

The four firms -- Great American Group, Hudson Capital Partners, SB Capital Group and Tiger Capital Group -- were among the group that handled liquidations of the Linens 'n Things, Mervyns, and Shoe Pavilion chains.

Canadian stores -- The Source by Circuit City-- will remain open as the company looks for a going-concern buyer.

. . .

No Circuit City executives were in the courtroom to hear Bankruptcy Court Judge Kevin R. Huennekens say he found it "unfortunate that the debtor finds itself in the position."

The judge said the outcome is sad for the chain's employees, management, vendors and the Richmond community, where Circuit City played a big corporate role.

"This is the most difficult thing I have had to do since joining the bench," said Huennekens, who became a bankruptcy court judge in 2006.

He asked Circuit City's attorney whether a deal could be struck if an extension until Tuesday was granted.

Gregg M. Galardi, a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP that is representing Circuit City, said that extension would not be enough time, given circumstances. Given 30 days the chain might be closer to a deal, but Galardi wasn't confident even with the extra time a deal could be worked out.

Galardi told the judge that as late as midnight Thursday, the retailer was working on a plan that would keep it operating but as a much smaller chain. He said executives had worked on two scenarios that would have shrunk the company either to operating 350 stores or 180 stores.

Galardi said the potential buyers could not get adequate vendor support or financing needed.

. . .

But Jeffrey N. Pomerantz, an attorney representing the court-designated committee of unsecured creditors, said creditors largely were ignored by the two going-concern buyers and never presented workable deals.

One potential buyer, Grupo Salinas, owned by Circuit City's largest shareholder, Mexican billionaire Ricardo Salinas Pliego, could not get the financing or trade credit to make a deal, Galardi said.

Salinas spent about $8.8 million to buy shares of Circuit City in the days after it filed for bankruptcy.

Pomerantz also said Salinas attorneys and representatives had only one conversation with the creditors committee.

The second buyer, Golden Gate Capital, a private-equity firm based in California, spoke to the committee once.

Calls to Salinas and Golden Gate were not returned yesterday.

Neither group, Pomerantz said, submitted any information that would indicate a going-concern buyer would come forward or could get the money to buy the company.

"We never saw evidence a buyer could get financing," he told the judge.

While the potential buyers were talking, Circuit City looked to extend its bankruptcy financing but was unable to do so.

Given the difficult credit circumstances and massive losses during the first months of bankruptcy, the creditors committee had no choice but to support the sale to liquidators, Pomerantz said.

"We share the debtor's disappointment. This has a profound effect on the community," Pomerantz said.

Contact Louis Llovio at (804) 649-6348 or LLLovio@timesdispatch.com.

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

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