HMV, a comedy of errors

Well, the inevitable has finally happened for HMV, after a long battle to fight off its decline and after another bad Christmas, the decision to go into administration does not come as a surprise.

Music and DVD chain HMV is to appoint an administrator, making it the latest casualty on the High Street and putting about 4,350 jobs at risk.

Deloitte will keep HMV's 239 stores in the UK and the Republic of Ireland open while it assesses the prospects for the business and seeks potential buyers.

Trading in HMV shares on the London Stock Exchange has been suspended, HMV said in a statement.

http://www.bbc.co.uk/news/business-21021073

Since coming to the stock market back in 2002 it has been almost a comedy of errors watching the company, the last five years being particularly painful for it as everything it did seemed to backfire. It became one of the favorites for short sellers who no doubt will now argue that they were right all along. Probably so, but for HMV listing on the stock market was probably the wrong decision in the first place. Once the decline set in, the pressures from the market would speed everything up. The need to do something is far greater when you have the market breathing down your neck and institutional shareholders to please.

Part of this comedy of errors was the decision back in 2005 to turn down a takeover bid.

The group became susceptible to a takeover following a poor period of trading up to Christmas 2005. Private equity firm Permira made a £762 million conditional bid for the group (based on 190p a share) on 7 February 2006, which was rejected by HMV as an insufficient valuation of the company. Permira made a second offer which increased the value, although HMV declined it on 13 March 2006, subsequently issuing a statement that the offer undervalued the medium and long term prospects for the company, resulting in Permira withdrawing from bidding.

http://en.wikipedia.org/wiki/HMV_Group

It does make you wonder what long term prospects the HMV management thought the company had back then given the decline to come in its core products, cd's, dvd,s, games and books.

The trouble for HMV was once the decline set in, its share price falling, it tried to put things right in a panic way, reacting to the market rather than preempting events and much of its debt came from spending to do this.  The move into live music was actually a good one, but costly and would take time too come good. The irony here was that as things got worse for HMV it was then forced into selling off the good bits to raise cash to please the banks and City. It sold its profitable live music and live music venues, Waterstone's, and while it hung on to its digital offering which it got into far too late to trouble Amazon, it was basically left with cd's, dvd's and games and its new venture into "technology" products. In other words, it sold off its best bits and was left with what was killing it and a hope that technology products would save the day. They were wrong.

For shareholders, the turning down of the Permira bid smacks of massive incompetence by HMV's then management. Permira could probably buy HMV for a nominal £1 today if it so wished. I suspect it is overjoyed that it escaped parting with its money back in 2005, although one can only wonder what direction the company might have taken had it gone private. There is a chance we may still find out.

There is a possibility that HMV will survive in some form although its stock market days are over. Game Group was rescued while in administration by Opcapita, who also bought Comet for a nominal £2 before closing its doors last November. A smaller, privately owned HMV could emerge from the stock market wreckage. Certainly someone could buy its Fopp stores and digital offering. HMV's suppliers probably still want a High Street presence for their products, just not the debt and cost of keeping the current HMV going. Despite all its problems HMV had around 22% of the market as of yesterday.

So, who might do well out of HMV's demise if you are looking for someone else on the High Street who just might pick up some of its business. One possibility is Dixons, that has had a recovery of sorts in the last year or so. Another is Home Retail Group and both report this week.

Dixons has already reaped the benefits of fewer rivals as US retailer Best Buy recently shut up shop in the UK. Despite this, high promotional activity over Christmas is likely to have kept profit margins constrained and investors will be keen to see if there is any improvement at its online PIXmania business.

The Nordic and UK chains should report reasonable Christmas trade but the thorn is its struggling southern European business. Declining sales will have continued, offsetting gains made in other parts of the group.

Caroline Gulliver, an analyst at Espirito Santo, said: "Coming on the back of Comet's administration, we would expect Dixons to take further market share, as it arguably has the most comparable service proposition to Jessops (as opposed to say, Argos), as well as a similar range."

Argos's owner, Home Retail Group, is also due to announce its Christmas trading update on Thursday. 

http://www.independent.co.uk/news/business/news/dixons-hopes-to-see-growth-following-its-rivals-demise-8449035.html

They won't pick up much from HMV's demise, but there are fewer places on the High Street now to buy technology products and Dixon's, owner of Currys and PC World have much of it sown up. Home Retail Group is interesting as it has cash and no debt. Both could be decent recovery stocks which actually survive the High Street massacre.