WH Smith put on the spot by Permira bid

375p-a-share indicative offer may trigger auction for struggling high street stalwart

The board of WH Smith will meet today to discuss a possible 375p a share cash offer to take the company private. But while the group's long-suffering shareholders may well be delighted with a potential opportunity to cash in at a 44 per cent premium to Friday's closing share price, the board is unlikely to roll over so quickly.

The board of WH Smith will meet today to discuss a possible 375p a share cash offer to take the company private. But while the group's long-suffering shareholders may well be delighted with a potential opportunity to cash in at a 44 per cent premium to Friday's closing share price, the board is unlikely to roll over so quickly.

Permira, the private equity house, must hope it has dealt a knock-out blow with its possible offer that prices the company at about £940m. Shares in the group shot up 35 per cent yesterday following news at the weekend that Permira had made an approach to close at 349.5p. The potential offer was seen by many as one they cannot refuse.

"If the offer is put to shareholders, we are sure that they will bite their arms off," Nick Bubb, analyst at Evolution Beeson Gregory, said yesterday.

The initial Permira offer may seem over the top to some, but it has teamed up with two former WH Smith directors, Simon Burke and Keith Hammill, who must know the value of the company. Mr Burke is the former Hamley's toy shop chief executive and had a seat on the WH Smith board when he used to run its Virgin Our Price music business. Mr Hammill, the chairman of clothes chain Moss Bros, is a former finance director of Smith who left when he lost out on the chief executive position.

But the board has staked its faith on Kate Swann, who was given a golden hello of £1.2m when she joined in November from GUS, much to the fury of shareholders. It will not be at all pleased that Permira has stolen her thunder with this week's announcement.

Ms Swann has been undertaking an operational and financial review of the ailing retailer, and Thursday is her big day. It is her first outing at the helm and she will be trying to convince the City that she has, at last, got the winning formula to stem the group's fall in profitability.

"Shareholders should note that as the approach is preliminary and there are a number of pre-conditions to the making of any offer, there can be no certainty that an offer for the company will be made," a statement from the board said yesterday. Permira has yet to carry out any due diligence on the company.

Some analysts think that until the board has at least made a go of Ms Swann's proposals, it will hold out on Permira's approaches. "We suspect the board will reject the bid and hope to trade their way back to 375p. They will certainly want to see how the operational review to be announced on Thursday, goes down with the market," Mr Bubb said.

Half-year profits on Thursday are expected to come in at £65m, down from £91m in the same period last year, and a round of job cuts is also expected. Up to 300 positions are thought to be at stake at its head office.

But save a few job cuts, many in the City are sceptical that Ms Swann can achieve much improvement in the business, and a private equity deal would give them a healthy, unconditional exit. "This to us seems more than a generous offer, as we believe there is no easy fix for WH Smith," Richard Ratner at Seymour Pierce said.

Matthew McEachran, an analyst at Investec, said yesterday: "The offer, were it to be recommended, would give investors at least what they could get from a successful Swann-led turnaround, but without any of the execution risks and without the risk of any sector-driven downside."

Shareholders need some convincing that management can carry out a turnaround, let alone have the patience to wait for it to take place.

"It will take some time for the share price in the market to catch up with the improvements that may well be under way in the business," a source close to the potential bidders said. "Private equity has a more empirical way of valuing the business as you don't have to deal with market sentiment."

WH Smith was once a cornerstone of the high street and is still one of the best known names in British retailing. It delivers to 22,000 trade customers daily and has a 36 per cent share of wholesale magazine sales and 33 per cent of newspapers in the UK.

From its 54 distribution centres it serves independent newsagents as well as multiple retailers.

But Smith's sales have been under pressure from its supermarket rivals, online retailers and other music and book specialists for a number of years. They have undercut Smith's prices on books and CDs, and drawn away its traditional customer base, leaving it with the unpalatable business proposition of having "nothing special to offer". Many Smith's customers now buy only newspapers in its stores, which is not enough to grow the business.

Shareholders have got used to profits warnings - and the prospect of a dividend cut is also now looming large.

"The group has sufficient resources to maintain its dividend, but with possible plans of big store investment, it may look to conserve cash," analysts at Numis Securities said yesterday.

Less than two months after Ms Swann took over as chief executive in November, the company issued a severe profits warning after a dire Christmas trading period. Sales were flat and profit margins slid by 2 per cent after promotional gimmicks did not pay off.

Ms Swann blamed the layout of the stores for their poor sales. Gift products had been placed at the front, making it difficult for customers to find the more traditional items such as books and stationery they were looking for.

But she was credited with taking decisive action and sacked its head of UK retail, Beverley Hodson. Smith's has had to sell off its loss-making US division and is also now looking at an exit of its 207 stores in Asia.

Permira believes there is a future in the business, which can be achieved faster than the stock market would be willing to tolerate. It has long-held high street ambitions, which were laid bare during its battle for Debenhams. A takeover of Smith's would be its first return to major retailing since it sold Homebase two years ago.

A deal would also mark the move of yet another high street retailer into private hands. New Look, Selfridges, Harvey Nichols, Bhs and Arcadia are all now privately owned.

But Permira has taken steps to tackle accusations that it is attempting to pick up Smith's on the cheap - a common complaint that has scuppered a number of private equity deals. It is including an equity alternative in the bid plan, allowing shareholders to retain a stake in a separately listed company owning a minority of the shares.

The Permira interest may smoke out other potential bidders. There has been speculation that Tesco would mount a takeover bid. Three years ago, Smith's and Tesco planned to set up an exclusive national arrangement for distributing magazines but scrapped the idea after criticism from publishers and newsagents' representatives, who warned that small shops would face higher costs.

It is thought that other potential bidders have run slide rules over WH Smith during the past year, but they have been put off because the group has little freehold property to sell. The business has strong cash flow, but the stores are likely to need significant capital investment after years of cutbacks.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn