Simon Fox stated, as CEO in 2011, that HMV did not have ‘full credible equity history’ – but still the firm limped on
If HMV was going to fail it was always going to be after a Christmas sales surge, when the tills were as full of cash as they were ever going to be and when the shelves were depleted of stock.
Such timings are critical to creditors, and unprecedented January sale discounts were a clear sign that the end was nigh.
It remains to be seen whether the administrators Deloitte can find a buyer for a part or all of the business.
Looking back at the company’s recent history it appears it was perhaps a minor miracle that HMV remained a going concern for so long.
Take a look at this share price chart. Stock market investors twigged two years ago that the business contained next to no value for shareholders.
Indeed, as far back as June 2011 HMV’s chief executive at the time, Simon Fox, said the business had some way to go before it had a “full, credible, equity story” for shareholders.
This, despite big revisions to its borrowing agreements with Royal Bank of Scotland and Lloyds Banking Group. In 2011, in the spring and early summer, these two banks, both partly state owned, could have pulled the plug. They did not. But nor, quite rightly, did they re-capitalise the business to rude health.
In fact, from that moment onwards HMV was to limp on as a corporate creature all but controlled by its debt commitments. A zombie.
Wind the clock forward a year and, in the wake of the busy Christmas 2011 trading spell, the company was again on the brink. The two banks’ deliberated: should they call in HMV’s unsustainable loans, or should they “extend and pretend”?
At this point, clearly worried suppliers, such as film houses and record labels, rode in to join the rescue party.
If RBS and Lloyds were prepared again to loosen HMV’s lending terms, then the DVD and CD suppliers would take on some of the ailing retailers solvency risk. A backroom deal was done. Shareholders were told little of it, but that didn’t matter; they were effectively out of the picture already.
Asked if the intervention of suppliers meant an equity story was finally resurfacing, Fox was grim-faced: “I don’t thing we can quite say that.”
Like hapless souls stuck in the first circle of Dante’s inferno, without hope, HMV shareholders were to live on in desire.
HMV’s two lenders issued a joint statement on Tuesday noting they had “provided significant support to HMV over the past two years, as it has sought to reshape and restructure its business in the face of extremely difficult trading conditions”.
Sounding like corporate undertakers, they sombrely reflected: “Unfortunately, despite the best efforts of management, lenders and suppliers, it has not proven possible to avoid a formal insolvency process.”
For now, few are asking whether two years of forbearance was in the best interests of these financially stretched banks, or indeed of their largest shareholder, the taxpayer.
Small companies will gripe that they see little of this kind of tolerance from these and other lenders. Certainly, when the future of a high-profile, big employer is at stake the decision making of a state-owned bank looks to be, let’s say, complex.
In their hearts, who at RBS or Lloyds really thought a strategy of diversifying into faddish, outsized headphones was likely to offset the elemental forces stacking up against HMV’s core business of DVD and CD sales?
The growth of digital downloads, the recession and competition from supermarkets were all eroding its business performance.
By far the biggest impact, however, was the explosion in popularity of mail order websites such as Play.com, Amazon, and Tesco.com. For almost a decade these companies exploited a loophole in EU tax rules to ship DVDs and CDs at VAT-free prices from the Channel Islands – thereby undercutting HMV.
In 2005 HMV sought to copy the model, establishing a warehouse of its own on Guernsey. The ambition was to increase online sales to 20% of total sales in three years. They never got close, in part because Play.com poached HMV’s top web executive, Stuart Rowe.
Remarkably, whenever the Guardian wrote about the tax loophole damaging HMV’s business, the company complained. Why were we reporting on these inconsequential matters?
The Labour government ignored the issue also; it too attacked the Guardian’s campaign against the VAT loophole.
But George Osborne, the chancellor, did attempt to close it down last year, acknowledging in the Commons that the VAT-free Channel Islands trade, worth more than £500m a year, amounted to “exploitation that has left our high-street music stores fighting a losing battle”.
It wasn’t until this measure had been announced that Fox, who has since departed to Trinity Mirror, finally spoke publicly to voice his frustrations about the disadvantages facing HMV stores as they tried to compete with offshore VAT-free websites.
Despite a near monopoly in many towns, HMV stores were seeing sales slump year after year, even at paper-thin margins.
Fox said: “Unfortunately, [Osborne’s] legislation closes down low value consignment relief [LVCR] only from the Channel Islands. It remains to be seen what our competitors will do, but undoubtedly there’ll be a temptation to go to Switzerland or wherever … the closing of LVCR rules is a good thing, but the way it has been implemented doesn’t necessarily solve anything.”
As the Guardian has reported recently, some large websites have quickly found ways to circumvent Osborne’s crackdown on VAT avoidance.
A quick search on the internet shows HMV.com, which has closed its Guernsey warehouse and returned its mail order operations to the UK, is regularly more expensive than other traders.
Until this VAT avoidance is dealt with more firmly HMV’s 240 high-street stores will stand little hope of a meaningful life after administration.
The chancellor promised to act against other jurisdictions if the VAT-free sites relocated away from the Channel Islands. They are now calling his bluff. Will he respond?