Can HMV reinvent itself?
BBC business editor Robert Peston on the silent white assassin of the business
In its last full year, HMV had sales of more than £2bn. It employs 13,000 people. It has 600 stores in the UK. And it is responsible for more than a third of all music CD sales here and more than a quarter of all DVD sales.
It owns the only remaining chain of recorded music stores in this country of any size, the eponymous HMV shops. And its Waterstone's chain is the dominant force in specialist book retailing (from real shops) by a country mile.
On the face of it, HMV is an important employer and it is pretty important to our creative industries. Smaller record companies, for example, find it hard to shift their back catalogues at a profit anywhere else (Tesco won't take stuff outside the charts; online margins are wafer thin).
Here is the jaw-dropping statistic. At last night's closing share price of 11p, HMV has a stock market value of just £47.65m - down from £650m less than two years ago.
What's going on?
Well HMV is about to breach the terms, or covenant, on a £240m borrowing facility provided by eight banks, led by those semi-nationalised giants, Royal Bank of Scotland and Lloyds.
That means the banks have the right and ability to demand all their money back. But, of course, HMV can't possibly repay in an instant the £130m it has actually borrowed out of that £240m.
So unless HMV can reach an accommodation with the banks, its directors would have no option but to call in the administrators under UK insolvency procedures. HMV - a legendary name in the history of the recorded music industry - would be bust; the shares would be worthless.
What's going to happen?
Well early next week HMV will make a presentation to its banks - which are expected to be advised by the accountancy firm Deloitte - on how it intends to regenerate its business.
Then the banks are expected to take two or three months deciding whether to pull the plug or keep the lights switched on.
As for the breached covenant, it relates to the minimum permitted ratio between HMV's earnings before interest, tax, depreciation and amortisation - a proxy for cash generated by the company - and the total rent paid by HMV for its stores.
The covenant matters to the banks because landlords rank ahead of them in the queue of creditors; landlords get their money first in a wind-up. So for any retailer, as and when aggregate rents represent too high a proportion of EBITDA (or cash flow), the banks start to fear they'll lose money on their loan.
Which is one reason why HMV has already announced that it will close 48 HMV stores and 12 Waterstone's.
But simply reducing the number of rent-paying stores does not get to grips with arguably the more fundamental problem.
What will ultimately determine whether the banks decide to keep HMV afloat is whether they are convinced HMV has a credible survival plan to cope with markets that are vanishing into cyberspace before its eyes.
To put it another way, Apple - with its iPod and iPad - is the silent white assassin of HMV, because more and more of us are choosing to download music, games and films, rather than buying those silvery discs. And Waterstone's is being squeezed as we opt to download books on to so-called tablets.
The magnitude of this shift can be seen all over the world: chains that specialise in films and music barely exist anywhere these days (there is no equivalent of HMV in the US any longer, for example); and book stores are going bust wherever you look (Borders Group in America filed for bankruptcy protection last month).
That said, HMV remains in profit, although profit is shrinking. And, unlike Woolworths - which disappeared at the end of 2008 - consumers have a pretty clear idea what the group's two brands, "HMV" and "Waterstone's", represent; they know the kind of product they will find if they enter one of the stores.
The problem is that they don't want as much of that product, in its traditional form, as they used to do.
So what is HMV's cunning plan? Well part of it is to join them rather than beat them: it is aiming to refit 100 stores this year, to give 25% of selling space over to the sale of new digital devices, those beastly tablets and handheld devices that are killing sales of "hard" software (the CDs and DVDs). Its aim is to generate a quarter of all sales from these assorted i-Thingummies.
Through its 50% ownership of a digital downloads business called 7digital, it plans to stay in the business of selling recorded music. 7digital has negotiated agreements with the likes of RIM so that the new Blackberry Playbook (a soon-to-be launched competitor to the iPad) will come with the 7digital download app already built in. Which means HMV should share in income from downloads on these devices.
HMV has other digital ideas too - such as trying to persuade publishers to provide hard copies of books that incorporate a right to download those books to a tablet.
The plan recognises that HMV can't survive by simply doing what it has been doing for the past few years: it has to acquire a meaningful share of the digital cake.
Will the banks be persuaded it can work?
It is not a plan which requires more money from them. HMV believes it can reinvent itself for the new digital world so long as the banks allow the group to continue to use the £240m already in place.
Even so, this is not a risk free decision for the banks. Corporate graveyards are filled with businesses that tried and failed to adapt to the kind of industrial shifts that confront HMV.
And if the banks do back "new" HMV, the controlled dematerialisation of HMV would still have pretty painful consequences for the group and its employees: over the coming three years, it will have to close more shops; not far off half of the 600 may eventually go.
Whatever happens, there will be quite a price for high streets and staff. But the highest social and cultural price - if not necessarily the maximum financial one - would presumably come from the business going kaput.
Which may or may not weigh on the minds of the two semi-nationalised banks, RBS and Lloyds, that are HMV's most important creditors.
You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.