Everything must go at HMV | FT Alphaville

Everything must go at HMV

Alternative title: What happens when lenders take effective control of an ailing PLC.

The answer to that, of course, is they make you sell decent businesses to pay back debt. To wit, we learn on Monday morning that HMV has been forced to put its profitable HMV Live business up for sale.

From the company’s interim results statement.

In addition, the Board has initiated a strategic review of HMV Live which may lead to its sale, the proceeds of which would strengthen the financial position of the Group.

For ‘may’, read will.

HMV has net debts of £164m and a sale of HMV Live should raise £30m-£40m given its recent reasonable performance.

Sales at HMV Live for the period were £31.2m, £2.4m up on the prior year and operating profit was £3.4m, £1.9m up on prior year. The venues business performed satisfactorily, with like for like sales at wholly owned venues down 1.5% and a contribution from two new venues, GAY Manchester and Manchester Ritz, which opened in April and September 2011 respectively. Utilisation and spend per head improved over the prior year.

Festivals performed in line with expectations, with operating profit £1.2m up on last year. The new Wilderness festival achieved critical acclaim in its first year while the more established festivals, including Lovebox, Global Gathering and High Voltage all improved their profit performance.

As retail analyst Nick Bubb notes, a sale won’t guarantee survival but it will keep the company alive long enough to flog a few more assets, such as it’s stake in 7Digital. Not only to survive but continue with its move into “Technology” — or flogging iPod, speaker docs and absurdly overpriced headphones endorsed by Dr Dre — for a little bit longer.

On that note, HMV is encouraged by the performance of its next generation stores, although it’s difficult to get any hard figures from the statement:

In order to offset the decline in our core product markets we have accelerated the evolution of our product mix towards technology with the roll-out of an enhanced technology offer to 144 stores by the end of October. The full benefit of these space changes is not apparent in the half year results, due to the timing of the refits towards the end of the period, but we are encouraged by the early performance of these refitted stores. In the first half technology and related products grew to 14% of sales (2010: 12%) and this is expected to be much higher in the second half.

We do, however, have some hard data on current trading and it’s not great — down 13 per cent (year-on-year) over the past seven weeks. And remember last year’s comparative includes the big snow disruption of 2011.

That said, there’s an Xmas Saturday this year and that could make a big difference to the eventual sales outcome.

However, even a decent Christmas might not be enough, argues Panmure Gordon’s Philip Dorgan:

HMV has announced first half losses of £36m and net debt of £163m. Current trade is poor, with like-for-like sales down by 13%, although this should improve with the extra Saturday of trade. There is a material concern about the ability to trade as a going concern.

HMV needs to convince its suppliers to trade on normal terms. Then it needs to convince its banks that it can generate enough cash to pay down its debt. Finally, it needs to create an equity story. This looks a monumental task.

What to do with the shares: It is difficult to see equity value being created for the shares. The enterprise value is £179m, of which the equity counts for just £16m.

Still, management get full marks for trying.

Related link:
HMV staggers on – FT Alphaville