Video games specialist Game was teetering on the brink of collapse on Friday after a rescue deal put forward by private equity firm OpCapita appeared to have been given the cold shoulder by lenders who are owed more than £100m.
Earlier this week, OpCapita, the turnaround specialist which recently bought electricals chain Comet, put forward a proposal to the retailer's banks – led by state-controlled Royal Bank of Scotland – to take over its debt and settle accounts with suppliers who are owed £40m.
The plan offers a way back for the retailer, which officially warned investors at the start of this week that it was on the brink of administration. A spokesman for RBS, which is owed £45m, said talks with all parties were continuing, but insiders suggested further discussions had not taken place even though time is short.
Game needs to secure new financial backers quickly so it can pay its quarterly rent bill, due on 25 March, and avoid a painful restructuring that is likely to involve heavy job losses at the group, which has around 6,000 UK staff.
The situation is a complicated one as a number of banks are involved in the rescue talks, with Barclays, HSBC and La Caixa all understood to be owed around £30m each. Another banking source also suggested the OpCapita deal was still a viable option.
The crisis at Game was set in train earlier this year when worried lenders reduced the retailer's borrowing facilities. That meant the management team, led by chief executive Ian Shepherd, was forced to ask suppliers for discounts. However major industry players such as Electronic Arts and Nintendo refused, leaving the retailer without stock of new titles such as Mass Effect 3 and Mario Party 9.
Game's problems come at a low point for the industry which has suffered falling sales for the past three years due to the absence of a killer new console to whet consumers' appetites. Sales of physical, boxed games were down 7% at £1.4bn last year. Just as HMV, the last national music and DVD chain on the high street, has been hit by rising internet sales, downloads and competition from supermarkets, Game is also suffering as gamers cut out the middle man. Industry trade body UKIE reckons nearly £680m was spent on game downloads last year.
"People are buying more and more games but they are looking at increasingly digital methods of purchasing them," says UKIE's Dan Wood, pointing to games such as Angry Birds, which has now been downloaded 500m times.
The speed with which sales are transferring to the internet has caught retail chains big and small off guard. Game has 600 UK stores – a legacy of the boom years that preceded the financial crisis – and that is seen as too many at a time when Britons' disposable incomes are under pressure. Game's woes are set against a backdrop of industry change with some commentators going as far as to predict the "death of the disc" after industry blogs buzzed with rumours that Microsoft had said its hotly anticipated Xbox 720 will not contain a disc drive.
All might not be lost for retailers, however, because although the Xbox might not take discs, it might use a smaller cartridge instead.
There is a practical reason for this because weak internet connections in some countries are a barrier to an iTunes-style buying revolution. Experts point to comments made by key industry figures such as Sony's chief executive, Kazuo Hirai, who told one interviewer: "We are doing business not just in the developed nations of the world, but also in parts of the world where network infrastructure isn't as robust as one would hope for. There's always going to be requirement for a business with the size and scope of our magnitude to have a physical medium. To think everything will be downloaded in two years, three years or even 10 years from now is taking it a little bit to the extreme."
