Banks give HMV more time in fight to survive

The company, which owns 731 HMV, Waterstone’s and Fopp stores, said its banks have agreed to put back financial tests from the end of April to the beginning of July.

The agreement was negotiated after HMV presented its plans to secure the future of the business, which include the potential sale of book chain Waterstone’s. The company said negotiations are still ongoing.

The extension comes as HMV warned for the third time this year it would miss profit expectations as trading continued to suffer last month.

The company said pre-tax profits would now be around £30m – down from a previous estimate of £38m at the beginning of last month.

HMV said trading conditions have remained difficult since the group’s last update on March 1, echoing comments from other retailers including Dixons, Argos and Mothercare, which all warned on profits last month.

In addition to the tough economy, HMV, which employs 13,000 staff, is battling intense competition from supermarkets and internet retailers as well as the fast-growing popularity of digital downloading.

Investec analyst David Jeary said: “The intractable problem remains that HMV is King Canute to the incoming tide of digitalisation. HMV needs to re-capitalise, probably via a combination of distressed asset sales and an equity raise.”

The firm, famous for its Nipper the dog trademark, has been shifting its emphasis from fast-declining CD and DVD markets into the growth markets of new technology, live music and event ticketing.

HMV Group, which is closing 60 stores over the next 12 months and shedding jobs, aims to cut costs by another £10m a year.

It saw sales plunge 13.6 per cent in the UK and Ireland over Christmas and has since been hit by supplier troubles as firms struggle to gain credit insurance due to fears over HMV’s trading.

Seymour Pierce analyst Kate Calvert said: “The speed of deterioration in profitability of this business confirms that management’s strategy is not arresting the very real structural pressures on the core retail business from on-line.

“More radical action is needed, we believe, in terms of store closures or breaking up the business.”

Last month HMV flagged higher-than-expected year-end debt of £130m and said it did not expect to meet conditions applying to its bank loans when tested in April.

Yesterday the group said its lenders, which include state-backed Royal Bank of Scotland and Lloyds Banking Group, have agreed to extend the period for covenant tests to the 12 months to July 2.

This would provide the group with additional time to consider a rights issue or realise cash from the possible disposals of Waterstone’s and HMV Canada, which the firm confirmed last month it was considering selling.

Billionaire Russian businessman Alexander Mamut, who owns 6.1 per cent of HMV, has been linked with a bid for Waterstone’s along with founder Tim Waterstone.

Nomura, which is advising HMV Group, has offered Mr Mamut and Mr Waterstone 15 days to come up with an offer to buy the book chain, it was later reported.

Mr Mamut’s war chest is set to be bolstered with the imminent initial public offering (IPO) of his mobile phone retail business Euroset.

Matt Walton, retail analyst at Verdict Research, said HMV’s hard and fast fall in profitability was extremely disappointing.

Mr Walton said the retailer was hit by customers increasingly turning online to buy music, to sites including Amazon, iTunes and Play.com.

“Customers are enjoying the convenience of being able to buy at a time which suits them as well as the ability to download music directly onto their music player. The benefits of being the last physical retailer in the market as well as the buoyant games market have now fully annualised out.”

It is understood HMV needs to raise £75m in return for a relaxation of its lending covenants.

Other potential bidders for Waterstone’s include retail restructuring specialist Hilco, which has owned Allied Carpets, Habitat and MK One.

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