Waterstone could link with Russian billionaire to buy back firm

TIM Waterstone could team up with Russian billionaire Alexander Mamut to buy back his eponymous chain of book shops from HMV.

Shares in HMV Group climbed 4.5 per cent on Friday after the firm effectively slapped a "for sale" sticker on its Waterstone's business as the music retailer struggles to deal with its mounting debts.

Waterstone founded the book-selling chain in 1982 using a redundancy pay off. WH Smith took a stake in Waterstone's in 1989 and bought out its founder in 1993, before selling the chain to HMV in 1998 for 300 million.

The imminent initial public offering of Euroset, Mamut's mobile phone retail business, looks set to bolster the Russian's war chest head of a possible deal.

Mamut has already built a 6.1 per cent stake in HMV, expected to make about 75m from the sale of Waterstone's, which has some 4,500 staff spread across more than 300 branches in the UK, including 26 in Scotland.

The cash would go towards paying down HMV's 130m debt, although the entertainment retailer stressed on Friday: "The group's lending banks continue to be supportive, our banking facilities remain fully available and the group is continuing to maintain a regular and constructive dialogue with its lenders." Other potential bidders reportedly hovering around the group include retail restructuring specialist Hilco - which has owned Allied Carpets, Habitat and MK One.

Hilco is thought to be interested in HMV Canada, the other business being sold off by HMV.

But Nick Bubb, a retail analyst at Arden Partners, warned that investors should not expect any sale of the Canadian arm to raise much money.

Bubb said: "Hilco will pay nothing for HMV Canada, which is moving into loss. There is no alternative to having a big rights issue, so caveat emptor - 'Let the buyer beware'."

Bubb, who predicted a "rescue" shares placing is on the cards for HMV, added: "Group pre-tax profit halved in 2010-11 to about 39m and we expect it to halve again in 2011-12."

HMV has faced increasing competition from online retailers and supermarkets in its core CD and DVD markets.

The chain is one of the few music and video retailers still standing after the recession claimed high street names including Borders UK, Woolworths and Zavvi, which was previously Virgin Megastore.

In last week's Budget, Chancellor George Osborne promised to even the tax playing field for companies such as HMV.He said: "We're going to tackle the exploitation of low value consignment relief that has left our high street music stores fighting a losing battle with warehouses in the Channel Islands."

HMV has been broadening its product mix as part of a fightback, branching into areas including technology and other entertainment-related products.

Last year, it unveiled a push into live music after buying Mama Group, which owned venues including the Edinburgh Picture House, the Warehouse in Aberdeen and the Hammersmith Apollo in London.