Sbarro To File For Bankruptcy By Next Week

Fast-food pizza chain Sbarro Inc. is preparing to file for Chapter 11 bankruptcy protection as early as next week.

According to people familiar with the process, Sbarro is already in talks with creditors for a “prearranged” restructuring deal that would cut in half the company’s nearly $365 million debt. Under this plan, creditors would forgive much of the debt in exchange for equity in the restructured company.

The sources also said a group of hedge funds holding Sbarro’s senior debt is communicating with the company to provide $35 million of “debtor-in-possession” financing to help keep the chain in operation while under bankruptcy protection.

“Sbarro continues to work constructively with our key stakeholders to restructure our debt and position the company for long-term success,” the company said.

“Throughout this restructuring process, the company expects to continue to operate in the normal course and without interruption.”

The company has been badly affected by the recession, and several months ago revealed it had doubts about its ability to continue operations.

A few months ago, Sbarro hired law firm Kirkland & Ellis, as well as investment bank Rothschild Inc., to help with reworking its finances. Possible restructuring deals with various creditors were also started.

The Melville, New York-based company has about 5,000 employees. As the recession dragged on, the chain started shedding jobs and closing stores.

Sbarro was started in the late 1950s by the Sbarro family in Brooklyn, N.Y. It was a grocery store that offered homemade mozzarella, imported cheese, sausage and salami. Its first mall location opened in 1967 at the King Plaza Shopping Center in Brooklyn.

It grew to more than 1,000 stores in 40 countries worldwide, and has become a staple in shopping malls and airports.

In the past two years, about 150 restaurants have been closed because of the recession. In 2009, Sbarro reported a loss of $37.2 million, while in the first nine months of 2010, it already reported a $29.3 million loss.

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