Banks give HMV a lifeline as profits dive again

HMV gets an extra two months' grace from its lenders - despite being forced to issue its third profit warning this year...

by James Taylor
Last Updated: 19 Aug 2013
By HMV's standards, today's latest unscheduled trading update wasn't all bad news. OK, so the troubled music and games retailer has just announced its third profit warning this year (and we're barely in April), this time cutting its forecast by a whole third - which is never a sign of rude corporate health. However, on the plus side, it has convinced its long-suffering lenders to extend its covenant deadlines by two months, to the beginning of July. Since most of the high street is having a shocker at the moment, we doubt this is because the banks think HMV's retail arm is on the verge of a miraculous turnaround. Slightly more radical surgery may be required...

When HMV issued its first profit warning of the year (we know, it's hard to keep up), it revised its forecast down to £46m; a couple of months later, it nudged this down to £45m. Now it's predicting that it will end its financial year (in four weeks' time) with profits of just £30m - less than even the most pessimistic analysts were predicting. 'Trading conditions have remained difficult,' the group told the stock market today, in one of the understatements of the year thus far.

It's hard to imagine things picking up any time soon. HMV made a big chunk of its profits around Christmas time even in the good old days. And with the entire high street feeling the pinch at the moment as cash-strapped consumers tighten their belts, every retailer in the business is expecting slower footfall in the coming months. That's even more true for a company like HMV, which was struggling to cope with structural changes to its marketplace (principally downloads) even before the economy went pear-shaped.

Given all of the above, it's not immediately clear why the banks have chosen to give HMV more time to pass its covenants. If the original date of April 30 had been left in place, HMV admits it would almost certainly have failed the tests. But the extension suggests that the banks think it might have more chance a couple of months later. Since an operational turnaround in this period seems unlikely, chances are that it will have to raise money by flogging bits of its business - including, probably, the Waterstone's book chain.

According to Sky News, Russian oligarch Alexander Mamut has been given about 15 days to come up with a suitable offer. If he's been low-balling so far, you could hardly blame him; this is a company locked in a survival fight, making a forced sale of an asset that's not necessarily all that attractive. So HMV is not really in the position to demand top dollar. Beggars can’t be choosers, as they say…
Finance Retail

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