Buyers size up HMV

Potential buyers are circling entertainment group HMV and considering bids for all or part of the business.

Private equity groups and former entertainment retail executives are among those casting their slide-rules over the retailer, which owns the Waterstone’s book chain as well as eponymous music stores.

The retailer is once again “on the radar” of private equity giant Permira, which made a 210p per share offer for HMV in 2006, one source familiar with the situation said.

Permira is thought to be mulling a potential bid with the involvement of media sector veteran Roger Parry, who in 2006 had been lined up to become chairman.

Industry sources believed there had been informal contact between the private equity house and HMV directors. The retailer declined to comment on “speculation”.

Sources also suggested that James Heneage, founder of bookseller Ottakar’s which HMV acquired in 2006, is monitoring developments at HMV and is considering making an offer for Waterstone’s - a claim rejected by Heneage.

Other individuals with a track record in book and music retailing are also understood to be speaking to financiers about putting together offers. Former HMV and Waterstone’s product director and Borders chief executive David Roche was among those being talked about this week as possible contenders. Roche, who has just left publisher HarperCollins where he was group sales and trade marketing director, was not contactable for comment.

After a dreadful Christmas and a decision to close 60 stores - the first tranche of which closed last weekend - City analysts believe a break-up of HMV could be on the cards.

Oriel analyst Ben Hunt said this week: “To unlock intrinsic value taking the company off the stock market would probably work best.”

He said that a bull case break-up scenario could value HMV at £186m, but questioned whether the potential returns would be appealing enough given the level of likely risk.

He said: “Using our bull case assumptions, an internal rate of return of 35% could be achieved if HMV was purchased for £110m or 26p per share.

“In reality, any bidder would have to buy at a decent premium to the current share price. Assuming a 30% premium is required, the shares could be interesting to the likes of private equity at 20p.”

He wondered whether Waterstone’s would attract buyers. He said: “Given the structural flaws in the book market - competition from internet retailing and supermarkets - we think private equity would hesitate to make long-term commitments given the financial engineering employed by the industry.”

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