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By Mark Harrington
Dallas
Last-minute talks aimed at salvaging NeoStar Retail Group collapsed late Friday, leaving the company's debtor-in-possession financing in question as the 650-store chain turns to a public auction as its final hope of survival.
The company confirmed today that a last-ditch attempt by company director Leonard Riggio to provide "credit enhancement" or other partial financing wasn't approved. (See Barnes & Noble Chairman Considers Personal Investment in NeoStar.) A spokesman declined to disclose details of the failed talks among Riggio, NeoStar's creditors and its DIP financing committee. At present, the company is "in the process of seeking bankruptcy court authorization to proceed with the auction plan." The company, in a statement, said it was also in discussions with its DIP lenders concerning financing during the auction process. Worse, vendors are being notified to stop shipping new inventory.
The spokesman said the decision to auction all NeoStar assets constituted the last hope for the chain, and he added, "We are looking forward to the auction process."
He said the DIP lenders as of early Monday had not demanded full payment of their loan, which had granted the chain a $70 million line of credit.
However, under terms of the agreement, all cash taken in by NeoStar is swept to DIP lenders, a process that could eventually choke the chain since it is expected to get no further cash outlays, said a source close to the company.
As reported last week, NeoStar, which has been operating under Chapter 11 bankruptcy protection since September, failed to meet certain covenants of its DIP financing agreement, making it in technical default on its loan. Riggio, who owns some 13 percent of NeoStar shares and serves as chairman of Barnes & Noble and NeoStar's executive committee, had offered to provide interim financing to help the chain through its cash crisis. The covenant NeoStar violated involved reaching three plateaus of credit support from its vendors. NeoStar was unable to reach a $20 million support level by Nov. 2. Precisely who might be interested in some or all of NeoStar's assets was questioned last week, given the weakness of software sales in mall locations.
Analysts didn't express high hopes of a quick sale at auction, at least not one to a computer-related entity.
"Mall-based specialty software stores are dead," said Adam Levin, president of Levin Consulting, Beachwood, Ohio. "The format isn't a working format. Retailing is all about giving customers what they want. The mall-based format makes it almost impossible to have the newest titles deeply stocked at good prices. It's self-defeating."
David Goldstein, president of Channel Marketing in Dallas, said given mall demographics of primarily teens and women in comparison with software's prime audience of males ages 25 to 40, mall stores are doomed to fail. But Goldstein said a non-software entity could be interested in the entire chain.
Levin said computer and electronics chains would do well to examine recruiting NeoStar's in-store employees, who number more than 4,000, to fill their ranks.
NeoStar rival Electronics Boutique, whose chief executive Joseph Firestone has boasted of double-digit sales increases in recent months, would be considered a prime candidate for the stores. But sources indicated Firestone has turned down previous offers to buy all or part of the chain.
Firestone couldnŐt be reached today.
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