City scorns WH Smith

THE CITY has reacted sceptically to WH Smith's purchase of Hodder Headline, which publishes John Le Carre and Stephen King.

WH Smith paid pounds 18m for 51.9 per cent of the imprint. The deal makes the company Britain's third-largest publishing house but has led to a sharp fall in its share price.

Analysts were dismissive. "It's a ridiculous deal. WH Smith has paid a whopping price to become a vertically integrated retailer," said one.

"Who else does this successfully? That's what the market is struggling with," said another.

"They have spent the remaining cash in the balance sheet. This was supposed to be the deal that made WH Smith a better business. But it's too far- fetched to work," commented a third.

Richard Handover, WH Smith's chief executive, insisted that the move would enhance earnings and was crucial to the company's plans to withstand the onslaught of supermarkets and internet retailers.

"WH Smith has a huge legacy in terms of brand. We want to extend that," he said.

WH Smith aims to distinguish itself from other retailers by selling more branded products, Mr Handover said: "We believe that content ownership is going to be very important." Currently there is very little that WH Smith sells exclusively.

The book market, where WH Smith has a 17.5 per cent market share, is changing rapidly. According to London International Bookfair, part of Reed Elsevier, the UK book market will grow by a fifth to pounds 3.3bn by 2002, with internet sales taking 12 per cent of the market. Moreover, it predicts that supermarkets will treble their market share from 5 per cent to 15 per cent.

WH Smith has responded aggressively. Mr Handover has disposed of Our Price and Waterstone's; sold and leased back its stores; and invested in Menzies, the Internet Book Store, Helicon (the encyclopedia and electronic publisher), and now Hodder Headline, which is also an important publisher of educational and professional books. "Hodder gives us the ability to be creative and aggressive," Mr Handover said.

At the same time, he is striving to improve the chain's high-street stores, which he admits have suffered from lack of attention.

The purchase of Hodder is only part of his strategy. WH Smith Online, the free internet portal, was launched in April. And in September, WH Smith will start to sell books through Open, the interactive digital television venture controlled by BSkyB and BT.