Disposal

20 May 2011

HMV Group plc

Disposal of Waterstone's and Update on Trading and Refinancing Negotiations

Introduction

HMV Group plc ("HMV Group" or the "Group") announces that it has conditionally agreed to sell the Waterstone's business to A&NN Capital Fund Management Limited ("A&NN Group"), a company controlled by a trust in which Alexander Mamut has an interest, for a total cash consideration of £53 million (the "Disposal").

The Disposal, which represents an important step towards strengthening the capital structure of the remaining HMV Group, is conditional upon shareholder approval, in relation to which a circular will be sent to shareholders in due course. The Disposal is also conditional on the receipt of approval from the pension trustee, the Pensions Regulator and consent from HMV Group's lending banks including a renegotiation of the Group's lending facilities.

Completion of the Disposal is expected to occur by the end of June 2011.

Update on Current Trading

Notes to table:

1. Like for like sales (decline)/growth and total sales (decline)/growth are stated at constant exchange rates.

2. HMV International comprises the results of HMV Canada, Hong Kong and Singapore.

17 weeks ended 30 April 2011

·; Continuation of weak entertainment market trends in HMV UK

·; HMV UK trials of increased technology space in six stores are significantly outperforming the rest of the estate, with extended product ranges still to come and the intention to roll out the new store layout to the majority of the estate by the end of the 2011/2012 financial year

·; Waterstone's sales deteriorated due to weakness in the book market and some loss of share

·; Tight management of costs, including the benefit of one quarter of the £10m annual cost savings achieved from head office restructuring

·; Of 60 UK stores previously announced for closure, 19 have now closed in HMV UK and 15 in Waterstone's, with 13 due to close in HMV UK during the first quarter of this new financial year

·; Good trading performance at HMV Live, with like for like sales across all venues up 15.7% on last year. Successful opening of G-A-Y Manchester, and contracts exchanged to reopen Ritz Manchester in autumn 2011

53 weeks ended 30 April 2011

·; Group profits before tax and exceptional items is expected to be around £28.5m*

·; Year-end net debt expected to be approximately £170 million, reflecting adverse sales performance combined with a tightening supplier credit environment

Background to and Reasons for the Disposal

On 1 March 2011, the Group confirmed that it did not expect to meet certain of the covenant tests in its existing bank facility when they fell due and had, therefore, commenced discussions with its lending banks regarding potential changes to the facility to ensure appropriateness for future trading conditions and to support delivery of the Group's strategy. It further announced on 5 April 2011 that the lending banks had agreed to move the measurement period for all relevant financial covenant tests from the 12 months ending 30 April 2011 to the 12 months ending 2 July 2011.

It has become clear that the Group needs to reduce its borrowing requirements in the short term in order to achieve a satisfactory refinancing. The Board has concluded that the most timely and effective way to achieve this is through the disposal of Waterstone's.

The Group's Waterstone's and HMV businesses operate in markets where there is significant structural change driven by digital delivery and intensifying price competition from supermarkets and internet mail order. The sale of Waterstone's will enable management to focus more closely on executing the turnaround at HMV and continuing to develop the HMV customer offering.

Accordingly the Board has taken the decision to sell Waterstone's for a total cash consideration of £53 million to A&NN Group, the fund management vehicle owned by a trust in which Alexander Mamut has an interest. Mr Mamut is also interested in 6.7 per cent. of the share capital of HMV Group plc.

This represents an important step towards strengthening the capital structure of the remaining HMV Group and will allow management to continue evolving the Group's strategy to deliver the greatest value from the HMV UK and Live businesses.

Information on Waterstone's

The Waterstone's business is the UK's leading high street bookseller, operating through 296 stores across the UK and Ireland, employing 4,500 people. The majority of these stores are operated under the Waterstone's brand, but the company also owns and operates the famous booksellers Hatchard's in London and Hodges Figgis in Dublin. Waterstone's is the only national specialist book retailer of scale in the UK, with the average sized store merchandising a range of around 30,000 individual books, with 120,000 titles in the largest store. Waterstone's also operates a website for the sale of both physical books and e-books for download.

Waterstone's generated revenue of £514 million and trading profit before exceptional items of £2.8 million in the 52 weeks ended 24 April 2010. Waterstone's had gross assets of £283 million as at 24 April 2010.

Principal Terms and Conditions of the Disposal

Under the terms of the Disposal Agreement entered into on 20 May 2011, the Group has agreed to sell Waterstone's to A&NN Group. The total cash consideration for the Disposal of £53 million on a cash-free, debt-free basis is subject to certain closing adjustments. Of the cash consideration payable, £40 million is payable on completion and £13 million is payable on 31 October 2011. This deferred consideration is not contingent on the satisfaction of any conditions. The business will be sold free of all pension liabilities, with the exception of the Irish pension scheme, which will transfer to the purchaser.

The Disposal is conditional on the approval of HMV Group shareholders. The Disposal is also conditional on the receipt of approval from the pension trustee, the Pensions Regulator and consent from the HMV Group's lending banks including a renegotiation of the Group's lending facilities on terms that are satisfactory to the Directors of the Group. The Group expects that the discussions with its lending banks can be concluded within the next few weeks.

The Group's lending banks are supportive of the Disposal and are considering it in the context of the renegotiation of the facility, the terms of which are yet to be determined. Discussions with the lenders remain constructive and they remain supportive of the Group.

However, if the Group is unable to secure a refinancing of the current lending facilities on satisfactory terms then the Disposal will not complete. Furthermore, if the Disposal does not complete the Directors do not believe that they will be able to renegotiate the existing lending facilities without having first reduced the Group's borrowing requirements through some alternative route. As such, the Group continues to assess all other options.

Financial Effects and Use of Proceeds

This disposal is an important step in the Group's strategy to reduce its borrowing requirements and facilitate the refinancing of its existing bank facility and ensure that the remaining Group is in a stronger position to meet the current challenges facing the business. As a result, it is anticipated that the proceeds from the Disposal will be largely used to reduce the Group's borrowing requirements prior to the proposed refinancing discussed above.

The Disposal will be dilutive to earnings.

Timetable

A circular providing further details of the Disposal will be posted to shareholders in due course in advance of a General Meeting which is expected to take place in June 2011. Completion is expected to take place shortly thereafter.

Commenting on the disposal, Simon Fox, Chief Executive of HMV Group, said:

"Having fully explored the options available to it, the Board believes that a sale of Waterstone's to Alexander Mamut provides a good new home for the business. We expect this deal to enable the Group to achieve a reduction in the Group's borrowing requirements, and, in turn, focus on plans for transforming the HMV Group into a broad-based entertainment business.

"Waterstone's is a great business with high quality people who have tremendous passion for bookselling. The Group is grateful for their contribution and wishes the team continued success. I am confident the deal will enable Waterstone's to go forwards and to remain at the heart of bookselling in the UK for a very long time to come."

Commenting on the disposal, Alexander Mamut said:

"We are extremely pleased to have reached an agreement to acquire Waterstone's and its great heritage. I believe that our investment and strategy will secure a dynamic future for the UK's largest bookshop chain and I look forward to working with its booksellers in building on the principle of excellent bookselling which is at the very heart of the business."

Enquiries:

HMV Group plc +44 20 7404 5959**

Simon Fox, Group Chief Executive

David Wolffe, Group Finance Director

Paul Barker, Director of Corporate Communications

Nomura International plc

(Financial Adviser in relation to the Disposal)

Aidan Clegg +44 20 7521 2000

Ed Matthews

Brunswick +44 20 7404 5959

Laura Cummings

Nick Cosgrove

* The range of analyst expectations for pre-tax profit before exceptional items for the financial year ended 30 April 2011 is £26-30m (Reuters Knowledge / HMV Group plc. Based on forecasts since 5 April 2011, the date of the Group's previous trading update.)

** All calls via Brunswick

Nomura International plc, which is authorised and regulated by the Financial Services Authority in the United Kingdom, is acting for HMV Group plc and no one else in relation to the Disposal and will not be responsible to anyone other than HMV Group plc for providing the protections afforded to clients of Nomura International plc nor for providing advice in relation to the Disposal described in this announcement.