HMV shares plunged yesterday after the struggling retailer warned that its profit was likely to miss targets.
The book, CD and DVD company also said it would have to renegotiate some of its loan agreements as it struggles to steady the business.
HMV insisted it is not yet in breach of any of its lending rules and its banks remain supportive, but says it is now trying to renegotiate terms.
But it admitted that its net debt was expected to be not less than £130m.
Meanwhile the trading statement said pre-tax profit for the year was likely to be below the £45m forecast.
HMV paid £18.25m for a 50 per cent share in the Aim-listed Mama entertainment group in 2009. The deal handed HMV branding rights with Hammersmith, for example, to be renamed the HMV Apollo. But the move to diversify also saddled it with more debt.
Chief executive Simon Fox yesterday defended the company’s strategy in the face of the competition from downloads
He said: “We are confident that our plans will ensure HMV’s long-term and sustainable future.”
The company is closing 40 HMV stores and 20 of its Waterstone’s bookshops, in a bid to rein in costs.
Its shares plummeted 19.6 per cent yesterday to 16.69p after having been boosted last week amid speculation that Russian tycoon Alexander Mamut was planning a bid for Waterstone’s.
Arden analyst Nick Bubb said yesterday: “The shock is that HMV has flagged that year end net-debt will be way higher than expected at around £130m (we had a £70m debt forecast), because of a working capital squeeze and what it calls “changes in product mix”.
HMV also confirmed Philip Rowley, a former chairman and chief executive of AOL Europe, will replace Robert Swannell as non-executive chairman.