U.K. Music Retailer HMV Seeks Insolvency Protection, Sale

LONDON -- U.K. music retailer HMV on Tuesday said it has decided to seek insolvency protection and will suspend trading of its stock while administrators look for a buyer for its business.

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The U.K. administration process is similar to Chapter 11 bankruptcy filings in the U.S. Administration typically allows a business to continue operating, while administrators look to reduce debt, restructure a business and look for potential buyers.

HMV, which was founded in 1921 and has sold such entertainment product as music, movies and video games, has about 4,350 employees and 239 stores in the U.K. and Ireland.

One HMV investor that is likely to be asked about its interest in a purchase of the company is private equity firm Apollo Global Management. The administrators are likely to highlight that HMV can now be acquired at a discount and that it has the support of such big content providers as Universal Music Group and other music labels and film studios that sell CDs and DVDs in HMV stores.

The administrators are also likely to look at possible store closures or sales and layoffs, according to observers.

Universal Music's liability in the administration process is the topic of much coverage in the U.K. It is understood to be limited to about 40 HMV stores and be more than covered by amounts budgeted in the music major's acquisition of the EMI recorded music business, which transferred to it some HMV store rent liabilities. A Universal Music representative declined to comment.

Music labels and film studios have provided financial support to HMV. For example, the company has gotten greater access to back catalogs and has been buying product on consignment, meaning HMV only has to pay for product that it actually sells.

In mid-December, HMV had highlighted weak holiday sales, or "weak current market trading conditions" as it called them, that have led it to face "material uncertainties." It added that it was probable that the firm would breach banking covenants at the end of January and said it would hold discussions with its banks.
 
"Since that date, the company has continued the discussions with its banks and other key stakeholders to remedy the imminent covenant breach," HMV said Tuesday. "However, the board regrets to announce that it has been unable to reach a position where it feels able to continue to trade outside of insolvency protection, and in the circumstances therefore intends to file notice to appoint administrators to the company and certain of its subsidiaries with immediate effect."

Added HMV: "The directors of the company understand that it is the intention of the administrators [from accounting firm Deloitte], once appointed, to continue to trade whilst they seek a purchaser for the business."
 
HMV's stock is suspended from trading on the London Stock Exchange effective immediately. It fell 8 percent on Monday, leaving it down 55 percent for the past year.

The administration process could take up to six to eight months, according to observers.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai