Banks resist HMV funding

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The Independent Online
THE pounds 800m deal to join the Waterstone's and Dillons chains of bookshops with HMV record stores has raised doubts among City bankers over the risks involved in supporting the deal.

To fund the deal HMV Media, as the new group is named, is raising pounds 600m of debt, with pounds 400m coming in the shape of various bank loans. But some bankers asked to participate fear that some of the loans are, in the words of one source, "racy and look very tight".

As the deal is fully underwritten by SBC Warburg Dillon Read and Merrill Lynch it will go ahead even if bankers invited to participate decline. But a failure to distribute HMV Media's debt to a wide group of banks could suggest there are concerns that a fairly complex deal will be at risk if the shops' underlying trading falters.

Compounding City anxieties about HMV Media this weekend was news that Borders, the American books-to-music superstore, is to open a superstore in Glasgow. The Borders outlet will compete directly with the flagship Waterstone's store outside London, its Sauchiehall branch. That has 30,000 square feet on five floors and stocks 150,000 titles. The average bookshop stocks 60,000. Borders will boast 40,000 sq ft of space at opening in November and will stock 150,000 titles and 50,000 music titles.

A source close to the deal said HMV Media and its bankers had addressed City worries that the company might not prosper if there were a downturn or if competition increased. "Book sales are resilient in an economic downturn, and we do not believe increased competition will make much difference except at the margin."

But many bankers remember the disastrous debt-financed deals of the late 1980s, including Isosceles and Magnet, both also retail deals. Banks have adopted a rule of thumb that retail deals involving complicated debt funding need extra cautious treatment. Exact details of this deal are confidential, and bankers have drawn a veil of secrecy over the term. But as well as the high-yield bonds, there are five separate loans with a range of repayment terms.

One analyst said that the prospect of a few banks turning down the deal was of little consequence. But he said a Borders store in Glasgow would be a real threat to HMV Media, which will be run by Tim Waterstone, who sold the bookshops he founded to WH Smith in 1989.

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