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Testing, testing: HMV Live auction nears blastoff

by Laura Board in London | Published January 4, 2012 at 11:37 AM

Struggling recorded music and DVD retailer HMV Group plc expects to begin the auction of its HMV Live division next month, and advisers have identified scores of potential suitors, including entertainment-industry companies and midmarket U.K. buyout firms.

HMV put the live music venues and festivals unit up for review on Dec. 19 just as the Maidenhead, England, group warned of material uncertainties about its ability to continue as a going concern.

HMV Live, which earned first-half profit of £3.4 million on sales of £32.1 million ($50.2 million), owns some of the U.K.'s most prestigious and storied venues, including the Forum in Kentish Town, north London, and the Jazz Café in nearby Camden. It was formed from HMV's February 2010 purchase of the listed Mama Group plc, and until HMV's financial situation deteriorated last year, the division was central to its corporate revival strategy.

Declining sales of recorded music and increased competition from Internet retailers have taken their toll on the 90-year-old HMV, whose shares have lost about 90% of their value in the past year. HMV is pinning its hopes on selling more digital technology products, such as speaker docks, from its stores, though in doing so must take on established electronics retailers, many of which are also struggling.

A person familiar with the situation estimates that HMV Live could fetch between around £60 million and £90 million. HMV paid about £46 million for Mama's equity in February 2010 and HMV CEO Simon Fox said last month he hoped the company could at least recoup the roughly £60 million enterprise value of Mama.

Bankers at Citigroup Inc. have spent the past few weeks preparing the company for sale, including making preliminary contact with around a dozen potential trade bidders and an even larger number of buyout firms. One of those targeted is Oakley Capital Ltd., a corporate finance boutique, private equity investor and asset manager founded by telecom entrepreneur Peter Dubens, who is reportedly interested in mounting a bid.

Potential trade bidders include corporate players in the U.K.'s burgeoning music festival scene and music publishing groups.

Oakley Capital spokesman Edward Bridges declined to comment, as did HMV spokesman Nick Cosgrove. A person familiar with the situation said the "distance is pretty considerable" between the preliminary status of the auction preparations and a potential bid from Dubens.

Oakley Capital owns the Time Out Group Ltd. listings magazines and guide books publisher.

First-round bids for HMV Live are expected by late February at the earliest, and the whole process is likely to take three to four months from the initial Dec. 19 announcement.

Parent company HMV lost £50.1 million in its first half, a deterioration from a loss of £30.9 million a year earlier. Its net debt was £163.7 million as of Oct. 29.

Analysts are anxiously awaiting HMV's Christmas trading bulletin Jan. 9 after HMV said in December that same-store sales in its retail unit had fallen 13.2% in the first seven weeks of the second half.

The company, which opened for business on London's Oxford Street in 1921 selling sheet music and gramophones, in May sold its Waterstone's book chain to a vehicle of Alexander Mamut for £53 million. The disposal convinced banks to sign a revised two-year, £220 million package of loans. In late June HMV sold its Canadian unit to restructuring specialist Hilco UK Ltd. for £2 million.

HMV's lenders include Royal Bank of Scotland Group plc, Lloyds Banking Group plc and Banco Santander SA.

HMV's loan package runs through September 2013. But the package is structured to encourage the retailer to pay the debt down early, persuading HMV to put its Live division on the block.

The exit fee due on part of the package, a £90 million term loan, will rise from 5% to 8% from April 2012, climbing again to 14% from January 2013.

A Citigroup team including Jan Skarbek is working alongside law firm Simmons & Simmons LLP on the auction for HMV.

HMV shares closed down 3.6% at 3.35 pence, giving it a market value of £14.2 million.

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