Millions of people will likely need bankruptcy help at some point in their lives. However, seeing prominent companies begin the same process can often come as a surprise. For this reason, many people were shocked to learn that RadioShack Corp., a technology retailer that has been in business for almost a century, will close on a bankruptcy agreement on or after after Thursday, February 5.
RadioShack traces its roots back to 1921, when the company began as a mail-order retailer for amateur radio operators and maritime communications officers. Over time, the company shifted its focus, becoming the go-to source of hard-to-find electronics and other technology. In recent years, however, RadioShack has faced increasing competition from Wal-Mart, Amazon.com and other tech retailers. To make matters worse, the company became heavily reliant on sales of mobile phones and accessories, which are part of a saturated market with low margins, furthering their struggles.
To solve these problems, RadioShack attempted to close 1,100 underperforming stores last year, only to have the move blocked by lenders, including Salus Capital Partners. Instead, the company was allowed to close no more than a few hundred locations, causing a dramatic shortage in revenues. To boost revenues, a group of hedge funds and other lenders gave the corporation a $535 million bailout in October to help the company make it through the holiday season. This move was ultimately unsuccessful, and Salus has since accused RadioShack of breaching the terms of a $250 million loan by accepting the bailout. RadioShack has denied these accusations.
Under the new settlement, the company’s existing lenders have agreed to lend RadioShack less than $50 million to refinance the balance of the group’s loan and help the company operate in bankruptcy. However, the company would also be required to sell leases on as many as 2,000 stores to Sprint Corporation and Standard General, its largest shareholder. The rest of the chain’s 4,000 U.S. locations are expected to be closed.
According to a number of bankruptcy experts, RadioShack’s settlement isn’t unusual for companies of its size.
“My impression is that large companies usually use bankruptcy to reorganize rather than as a means to go out of business,” says Charles Huber, Attorney at The Law Office of Charles Huber. “Here Radio Shack is using bankruptcy as part of its going out of business strategy. Usually bankruptcy is used to cancel contracts and leases that were burdensome to the company, so the company can emerge from bankruptcy on a healthier footing.”
According to sources interviewed by Bloomberg Business, the actual filing of the settlement could be delayed as final details are decided and changed. For example, Amazon.com has discussed acquiring RadioShack locations as part of their move into traditional retail and may buy up some of the unclaimed locations. Likewise, Sprint currently has too few of its own branded stores and currently relies heavily on third-party retailers. Buying more RadioShack locations would therefore align with CEO Marcelo Claure’s plan to reverse their loss of customers and avoid losing their foothold in the mobile phone market.