HMV announced a new agreement with its bankers on Friday that the entertainment retailer reckons will safeguard the company’s short term future, and the immediate boost in the firm’s share price suggests the City agrees. The new financing deal was possible thanks to a revamp of the retailer’s arrangements with its key suppliers, including the major record companies, which will see 2.5% of HMV’s equity distributed to said suppliers in the form of warrants.
The HMV Group has been struggling to meet the terms of its loan agreements for some time, the firm having net debt in the region of £180 million, much of it run up by the diversification-by-acquisition policy pursued by CEO Simon Fox when he first joined the firm. Loan agreements were reworked with the banks last year, but with more disappointing sales in the retailer’s core high street business it was still struggling to meet covenant tests tied to those finance terms.
According to Fox, the new agreements will alter the banks’ covenant tests, and give the retail firm more breathing space, assuring short term security. He added that he was also hopeful, under the new banking terms, that his company could cut its debts in half over the next three years, without factoring in the profits of any sale of HMV’s live division the MAMA Group, and even though his company is now heading for a £10 million loss this year.
The supplier deals are thought to be with Universal Music, Warner Music, Sony Music and some key movie companies. The terms of the new arrangements are confidential, but it is assumed it will see the suppliers taking on more risk over stock in return for the small equity position. It’s notable that no gaming companies have been mentioned as participants in the new deals, which backs recent rumours that HMV sees video games – a growth area in recent years – as less important in the years to come.
As previously reported, while HMV’s last man standing status in high street entertainment retail is no longer an advantage in terms of revenue (high street entertainment retail sales have slumped so far that, even with no competitors, there’s not enough business to prop up 200+ stores), it is a big help behind the scenes.
The big music and movie companies still rate a high street presence very highly (and no one’s quite worked out how to do the web-coffee-digital-entertainment-shop thing just yet), so will offer deals to their one remaining high street operator that would have been unheard of ten years ago. Plus, of course, HMV’s banks are the state-backed Lloyds and Royal Bank, and the government is in no mood to see another heritage retail brand go bankrupt, especially one whose demise would basically shut down a whole strand of high street shopping.
Though, of course, while better financing is key in the short term, and (despite what some bloggers say) the big music and movie companies have no immediate plans to phase out CDs or DVDs, it does remain true that HMV, in its current form, has a finite life-span. Unless, I suppose, you believe in Fox’s grand plan that selling gadgets is the solution, which it is not. And with HMV’s online offer still wholly lacklustre (in both mail-order and digital), and with the company’s one profitable (and most interesting) division now up for sale, Fox’s team really need to come up with some new business ideas as clever as the deals they have struck with their suppliers and bankers to ensure long term survival.
But, with his company having some good news to share for a change, it would be unfair to not let Fox have his temporary moment in the sunshine. Here’s what he had to say about Friday’s new banking arrangements: “Today’s announcement is enormously welcome. These developments represent a material improvement in our financial position relative to the statement we made at the time of our interim results”.
He continued: “The new relationship with our suppliers and the support of our banks will now enable HMV to wholeheartedly focus all of its energies – working in close partnership with its suppliers – on serving the changing needs of its customers ever more effectively. As a key part of this we remain committed to improving our specialist ranging and merchandising of music and DVD whilst also continuing to grow our sales in portable technology and further developing our online and digital offers”.
And, just in case there was any doubt about the support HMV has from its suppliers, David Joseph, UK chief of the music industry’s biggest player Universal, popped up in the retailer’s press release to say: “HMV is a vital part of the UK music industry and we are delighted that the support of the film studios and music companies is helping to secure its future. We look forward to working closely with HMV in the years ahead”.