Alliance Entertainment Files for Chapter 11

Alliance Entertainment Corp., the largest independent distributor of recorded music in the United States, filed for Chapter 11 bankruptcy protection Monday.

Alliance’s troubles could have a ripple effect on the music industry. The New York-based company distributes music for more than 400 small, independent labels. While independents as a group have gained market share against the majors--and are an important source of new talent--they often struggle to get distribution, because many albums are marginal sellers. Many retailers are scaling back to carry only top 100 hits.

Alliance, touted last year in the Wall Street Journal as an up-and-coming “seventh major” to rival the six major music companies, is reportedly talking to potential investors, including New York-based Apollo Advisors and foreign investment firm AC Israel Capital Corp. The company also is looking for a buyer for Red Ant, the year-old, Los Angeles-based label formed by former MCA Music Chief Executive Al Teller.

“We were forced to file for bankruptcy . . . as the result of pressures that were both internal and market-driven,” Teller, Alliance’s CEO, said in an interview from New York. “Unfortunately, the consumer business is very soft right now for everybody. The debt load confronting us just proved to be too heavy of a train. We were unable to turn the corner in time.”

Teller raised $20 million to found Red Ant last year. Alliance bought the label one month later for $40 million in cash and stock. Teller received stock worth $4.6 million, but the shares are now worth less than 10% of that.

Investment firm Wasserstein Perella, which had financed Red Ant, became the second-largest shareholder in Alliance.

Red Ant was Alliance’s bid at owning content, the highest-return but highest-risk part of the music business. To date, Red Ant has released only a handful of albums by such acts as Naked, Brand New Heavies and Cheap Trick--none of which performed well in the pop market. Like most start-ups, its artist roster is full of unknown artists. A deal that would have brought the well-known female hip-hop duo Salt ‘N Pepa to Red Ant from MCA fell through in the last month when Red Ant couldn’t come up with the money, according to sources.

Analyst Irene Lu of Libra Investments said Alliance is a victim of the music industry’s retail woes. “They took on a lot of debt, and they weren’t ready for it when they started to be hit with high returns from retailers,” she said.

Lu said a streamlined Alliance might have a chance if it sells Red Ant and cuts overhead. The company has said that by consolidating operations, it could save $25 million a year, starting in 1998.