HMV – On the record

There were high expectations for the IPO, as HMV was the first big company to float on the market for some time.

Many believed the action would herald a revival of investors’ appetites for new shares. But results of the IPO were a loud and sour note to an expectant City.

The shares were launched at 192p, the bottom of the bookbuilding range, by nervous bankers Schroeder Solomon Smith Barney and UBS Warburg.

And during the day, shares dropped as low as 175p before closing almost 20p below the issue price at 177p. The flotation raised the £351m, £140m of which went to debt-laden EMI Group, owners of a 14.5% stake in HMV.

Chartered accountant Neil Bright, who has been finance director since 1998, got less than the £500,000 expected for the shares for his troubles.

Company directors blamed a weak market for HMV’s disappointing float.

Chief executive Alan Giles said: ‘The fact that the book was not covered four or five times illustrates how difficult the new issues market remains.

The market has had a difficult time,’ he insisted: ‘I do not think there is anything company specific here.’

But according to City observers, the weak debut was more due charges the company outlined in the accounts of its IPO prospectus, which scared off investors who still had concerns following the Enron scandal.

According to fund managers and analysts, HMV inherited expensive leases in the US from its parent company that date back to 1998 and have been included in the accounts as ‘provisions.’

Last year the provisions amounted to £23.7m. Of these, £6.7m came from restructuring costs and restructuring mainly in the US. One City observer explained that by labelling the costs as ‘provisions’, they avoid putting it in their profit and loss column where it would knock £4m off its earnings.

The company also included a £6.6m exceptional charge on its accounts against the assets in its US operations.

Investors were also worried about the company’s future growth. Although HMV’s profits to January 26 2002 were £88m and its earnings before interest, tax, depreciation and amortisation amounted to £119m in the year to April 2001, investors fret that with the weakness of the company’s Waterstones stores and increased competition from Woolworths, HMV is not a good buy.

But the company remains optimistic. It expects a jump in sales from the World Cup and the Queen’s jubilee concert and returns from lucrative deals with Capital Radio Group and Tornado Group.

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