Disposal of Waterstone’s also a possibility following fourth profit warning by parent since last autumn

Entertainment group HMV is expected to consider an emergency rights issue after warning on Tuesday of a profits shortfall.

The retailer is also likely to rethink its opposition to a sale of the Waterstone’s books chain, which Russian tycoon and HMV shareholder Alexander Mamut is understood to have in his sights.

HMV, which earlier this year launched a store closure programme, revealed on Tuesday in a second profit warning that full-year earnings would be “moderately” below City expectations of £45m. It also expects to breach banking covenants.

Analysts were most concerned by the retailer’s debt, which will balloon to about £130m by the year-end - twice as much as was expected - and said that an equity fundraising must be a possibility. HMV chief executive Simon Fox would not be drawn on a potential rights issue or sale but he told Retail Week: “We have to evaluate all options. That’s what’s right for our shareholders.”

UBS analyst Adam Cochrane said: “In our view HMV would be in a much more stable financial position if it issued equity to pay down debt.” Arden analyst Nick Bubb said: “It is becoming possible after [Tuesday’s] debt disaster the group will have to sell Waterstone’s and raise emergency equity.”

Brokers thought HMV would probably need to raise at least £50m. They said it would need a convincing business recovery story to win support from shareholders in the event of a fundraising, which they fear could dilute the value of their holdings.

Fox reported that trading conditions remain harsh but HMV was progressing with business changes. More technology products are being introduced and two stores, Crawley and Islington, dedicate 20% of space to it. “We’re excited by the range of products that will be hitting the stores,” said Fox.

He said media business 7digital, in which HMV has a 50% stake, is the music partner on a range of devices including BlackBerry, Samsung and Toshiba products. He was also pleased by this summer’s music festival line-up, saying it is “the strongest for some time”.

This week HMV chairman Robert Swannell, who is also chairman of Marks & Spencer, stood down from his role, but will remain as a non-executive director. He is replaced by Philip Rowley.

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