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Struggling British entertainment retailer HMV is to sell its Waterstone's book chain to a Russian billionaire, using the £53-million pounds ($86-million U.S.) proceeds to cut debt as it fights to stay in business.

Shares in the 90-year-old company, which has issued three profit warnings this year, rose 3 per cent on Friday, after it said it had agreed to sell the 296-store Waterstone's business, Britain's largest bookshop chain, to a vehicle of Alexander Mamut.

Mr. Mamut, who has a 6.7-per-cent stake in HMV, owns Russia's biggest mobile phone retailer Euroset, which last month pulled a planned $1.5-billion stock market flotation. HMV said the deal is conditional on the approval of shareholders, the pension trustee and pensions regulator, and crucially the consent of its lending banks including a renegotiation of the group's lending facilities.

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Last month HMV's lenders, including the state-backed Royal Bank of Scotland and Lloyds Banking Group agreed to extend the measurement period for conditions applying to its bank loans to the 12 months to July 2.

Analysts welcomed the deal, which was for about £10-million more than most had expected, but expressed alarm at the level of HMV's debt which has ballooned to about £170-million at the firm's April 30 year-end, reflecting poor trading and a tightening of supplier credit terms.

"HMV remain in a lot of trouble and it is not clear that the banks will agree to a refinancing without new equity," said Arden Partners analyst Nick Bubb.

He said going cap in hand to its long-suffering investors "would be a big ask."

HMV said its talks with lenders remained "constructive" and it expected them to conclude within the next few weeks. It added that it "continues to assess all other options."

"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," said Chief Executive Simon Fox.

HMV cautioned that weak market trends had continued in its core HMV UK and Ireland business, where sales at stores open for over a year slumped 15.1 per cent in the 17 weeks to April 30.

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Waterstone's like-for-like sales fell 8.4 per cent as the book market weakened and it lost share.

HMV forecast underlying profit for the year to April 30 of around £28.5 million, worse than its previous forecast of around £30-million.

In addition to tough macro headwinds, HMV, which employs 13,000 staff (including 4,500 at Waterstone's), is battling intense competition from the supermarkets and internet retailers as well as the fast-growing popularity of digital downloading.

The firm, famous for its Nipper the dog trademark, has been shifting its emphasis from fast-declining CD and DVD markets into the growth markets of new technology products, live music and event ticketing. It is closing 60 stores and cutting costs.

Shares in HMV, which have lost 84 per cent of their value over the last year, were up 0.29 pence at 10.25 pence at 0817 GMT, valuing the business at about £43 million.

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