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Tower Records Spins Profits, Suitors

2 Dec, 2004 By: Erik Gruenwedel

Bolstered by a return to profitability, Tower Records and Video is looking more attractive to suitors these days.

The venerable 91-store franchise — now owned by a consortium of banks and investment groups, with founder Russ Solomon and family members retaining a 15 percent stake — is on tap to record upwards of $20 million in earnings while doubling its net worth to $200 million, according to sources familiar with the company.

In September at the National Association of Recording Merchandisers' annual convention in San Diego, Solomon accepted the large retailer of the year award, underscoring the chain's return to grace and, more importantly, its ability to embrace video, including more TV DVD and Latino fare.

Home video will account for almost 30 percent of sales this year.

“We have been profitable for the better part of a year,” said Kevin Cassidy, EVP, operations and merchandising, for Tower.

That's a turnaround for the West Sacramento, Calif.-based chain that in march emerged from a pre-packaged financial reorganization plan in U.S. Bankruptcy Court, under which $110 million in senior debt was converted to 85 percent equity ownership in the company in addition to $30 million in new senior notes.

Now the company looks to add digital services to its brick-and-mortar business. In January, Tower will launch an online (www.ripcord.com) and in-store digital music download service with a video rental subscription service in the works.

“We are in conversations to deal with the issue,” Cassidy said.

With prosperity come myriad suitors looking to augment their growth or portfolio through purchase of Tower.

Interested parties — from Yucaipa Cos., which owns music and video wholesaler Alliance Entertainment Corp., to financial investors Highland Capital and Hicks, Muse, Tate & Furst — have reportedly been involved in separate negotiations that thus far have amounted to little more than speculation.

“In some form, the profitability makes [Tower] more interesting to outside parties,” said a source familiar with the company. “It also puts current ownership in the mindset that they own a good thing and aren't going to give it up for short-term value.”

Tower's Cassidy declined comment.

Despite Tower's apparent return to profitability, the company remains ensconced within the music industry — a liability according to some observers.

“Everybody is still scared of the [music] business,” said retail analyst Dennis McAlpine. “They do have some pretty big stand-alone locations, which is good.

“With 91 stores, even if they are big ones, most of the home video retailers don't want to be in the music business despite talk about the industry's comeback [this year]. But nobody knows how sustainable it is, and I don't know who wants to be a music retailer going up against Wal-Mart.”

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