Bottom Line: Room for doubt

THOSE who remember the promises of increased efficiency and higher profits when WH Smith merged its Do It All chain with Boots' Payless four years ago could be forgiven for feeling a little sceptical about the proposed merger between Smith's Our Price chain and Virgin's megastores.

The do-it-yourself merger did have to contend with the worst housing slump since the war, while now the economy is improving. But Our Price lost money last year and profits this year are unlikely to be exciting, so the tie-up looks like an admission that Smith has failed to get the formula right.

Virgin's focus on home entertainment as much as music does seem to have been successful, although a forecast pounds 4m profit on pounds 120m sales is hardly a return to write home about. But its sale of 79 smaller Virgin outlets to Smith in 1987 was an admission that the Megastore format will not work in small stores. Whether parts can be imported to the Our Price stores must, therefore, be questionable.

The deal might yet be scuppered by the Monopolies and Mergers Commission, which is already conducting a review of the music retailing industry and may look askance at Smith's 29 per cent share if sales through its newsagents are included.

If that hurdle is cleared, Smith should benefit in the short term from taking a bigger share of Virgin's higher profits, but the long- term attractions of joint ventures have yet to be proved.