Break-up rumours give HMV shares a welcome boost

SHARES in struggling music, DVD and books retailer HMV Group rose sharply yesterday amid mounting speculation over possible moves to break-up the company.

Russian oligarch Alexander Mamut, who owns a 6.1 per cent stake in the group, is understood to be examining a range of options including the sale of the group's Waterstone's book chain.

Shares rose by 8.8 per cent yesterday to 24.75p, taking the company's value back over the 100 million mark although still well down on the 350m it commanded last year.

While HMV's poor trading has led to its current financial woes, it is thought Mamut is not necessarily looking for a change of management at the company which is led by chief executive Simon Fox.

Analyst Peter Smedley at Charles Stanley said he believed that the speculation over the break-up was "highly credible" although he doesn't think it would necessarily be the best strategy for Mamut, who has appointed Credit Suisse as adviser. "Apart from the well-documented and medium-term structural pressures from the internet and the supermarkets, HMV is suffering from more immediate pressing issues," noted Smedley. "The most pronounced is the recent removal of credit insurance and likely reduced supplier payment terms which could cause HMV's working capital requirements to increase substantially."

Mamut's move could also flush out Tim Waterstone, who founded the eponymous book chain in the 1980s, and is known to be keen to buy the chain back. He has also had business dealings with Mamut before in connection with a Russian retail chain of which both were shareholders.

But Smedley believed the sale of the book chain may not realise the figures which have been touted. "We see a price for Waterstone's of less than 50m, much lower than some commentators have postulated.

"The exit for the buyer of Waterstone's is not evident given the absence of trade buyers, whilst scope for growth is very limited which makes an IPO unlikely."

Shares in HMV, which acquired the remnants of the Scotland-based Fopp chain, have plunged since the beginning of January on news of poor trading and concerns over its financial stability.

Last month it issued a profits warning following the Christmas trading period. Although bad weather was partly to blame, its underlying markets were also under severe pressure. Rivals such as Woolworths, Zavvi and Borders UK have already gone to the wall in the past two years.

It said full-year profits would be at the lower end of City expectations of between 46m and 60m and the company said it was looking to close some 60 stores, around 10 per cent of its total portfolio, and seek a further 10m a year of cost savings.

A fortnight later it saw its shares retreat further after confirming that credit insurers had cut the cover they would give the group's suppliers.

Analysts said the market was particularly unnerved by the news because the withdrawal of credit insurance, which covers suppliers who provide goods on credit to retailers, was a major blow to Woolworths and Zavvi as they tried unsuccessfully to continue trading in the recession.

The group, which is battling cut-price competition from supermarkets and music downloads, said earlier this month that meeting a test of its banking covenants in April would be "tight".