Jeremy Warner's Outlook: Smith still struggling to find high street role

Airbus subsidies; Collins Stewart
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The Independent Online
Nearly a year into the job as chief executive of WH Smith, and Kate Swann must be wishing that Permira had managed to succeed with its mooted bid of 375p a share, though she was hostile towards it at the time. Permira was eventually scared off by the size of the pension fund deficit, yet there are plainly much worse problems to confront. Looking at the numbers announced yesterday it looks as if the private equity firm had a lucky escape. This was not the biggest loss in the company's 212-year history. That particular record was achieved at the time of the last big corporate restructuring, back in 1996. But at £135m after the customary kitchen sinking of the books, it was quite bad enough.

Nearly a year into the job as chief executive of WH Smith, and Kate Swann must be wishing that Permira had managed to succeed with its mooted bid of 375p a share, though she was hostile towards it at the time. Permira was eventually scared off by the size of the pension fund deficit, yet there are plainly much worse problems to confront. Looking at the numbers announced yesterday it looks as if the private equity firm had a lucky escape. This was not the biggest loss in the company's 212-year history. That particular record was achieved at the time of the last big corporate restructuring, back in 1996. But at £135m after the customary kitchen sinking of the books, it was quite bad enough.

More worrying still, Ms Swann reckons it will take another three to five years to achieve the hoped-for turnaround and she's not exactly ecstatic about prospects even after that. Most of the obvious things have been done. She's sold off or closed the peripheral overseas interests, and she's disposed of the Hodder Headline publishing business, yielding a decent return of capital to shareholders. She's also installed some basic retail disciplines in the core high street chain. Yet outside newspaper and magazine distribution ­ which ironically for a business once earmarked for sale, continues to flourish ­ she's yet to answer the question of what WH Smith is for.

Ms Swann's idea is that the group can best use its retail space and still impressive footfall by establishing authority in four core product categories. These are books, cards, stationery and home entertainment, in particular, DVDs. Most people who visit a WH Smith buy in only one of these categories, if they buy anything at all. If she can persuade them to buy in two, then she'll be making progress.

Yet it's an awfully tough challenge, hemmed in as WH Smith is by the big supermarket chains on the one hand and more specialist operators on the other. Most of us will continue to think of WH Smith just a bog standard newsagent which has lost the plot on virtually everything else it tries to sell. Even as a newsagent, it has become progressively unreliable, particularly for more specialist publications.

Still, the all-important Christmas trading period beckons. Two years ago, WH Smith went for margin at the expense of sales but in the process lost more sales than was wise. So last year it went for sales at the expense of margin, stupidly allowing the disastrous Beverley Hodson to stay on as managing director of UK retail just long enough to turn an already dire situation into a complete horlicks. She certainly managed to clobber the margins, but she failed to generate much in the way of extra sales either. Big stock write-offs soon followed.

So this Christmas it's full circle back to margin at the expense of sales. The fact that both margins and sales fell in the year to the end of August doesn't give much reason to believe the trade off will be any more beneficial this time either. Ms Swann has never allowed investors to think of her as a miracle worker, which is just as well for there is as yet little sign even of accomplished sleight of hand, let alone miracles. Ms Swann asks for time, and it's only fair to let her have it. The same cannot be said of Richard Handover, the chairman. What on earth the architect of this corporate road crash is still doing in situ nearly a year after recruiting Ms Swann and with no news yet of a successor is a mystery to all. Just what does a man have to do to get fired?

Airbus subsidies

It will not be the hottest potato in Gordon Brown's in-tray, but sometime in the next three months he may be asked to support a paper plane called the Airbus A350 with about £120m of taxpayers' money. Compared with the potential cost to the Chancellor of solving the pensions crisis, this is small beer. It is also a modest sum compared with the last time Airbus came by with the begging bowl and secured a £530m contribution towards the A380 super-jumbo.

None the less, Mr Brown should just say no. The company is now massively profitable and could finance the entire development of the A350 from its own deep pockets. Airbus has also long since ceased to be a struggling start-up aircraft manufacturer or a poor relation of Boeing. Last year it outsold and out-delivered the American jet maker. Airbus is certain to stretch its lead even further this year.

There are, however, two complicating factors. One is the fact that the competing aircraft from Boeing, the 7E7 Dreamliner, is also being state supported ­ not through the transparent mechanism of refundable launch aid which Europe adopts, but via the back door through Pentagon "black programmes" and donations from friendly overseas governments such as Japan. The other is that refusing to fund the A350 would make Tony Blair look like a very poor European. The other sponsors of Airbus ­ France, Germany and Spain ­ will almost certainly cough up their share of the launch aid, leaving Britain out on a limb, or perhaps that should be a wing, as this is the bit of the Airbus plane which the UK supplies. Failure to support the A350 would not immediately hurt the UK's standing in Airbus but it would bode ill when future investment decisions come to be made.

Airbus has been an undeniable success story for the UK and the rest of Europe. Even so, now is the time for it to stand on its own two feet. The Government will be hoping it won't in the end have to make a decision, for the the World Trade Organisation has been asked to arbitrate between Europe and America on the whole issue of aircraft subsidies. Regrettably, the WTO tends to proceed at a glacial pace and the wrangle could take 18 months to resolve. Time, perhaps, for Europe's new Trade Commissioner, Peter Mandelson, to step into the breach and use that famous special relationship to stitch up a deal.

Collins Stewart

Two down, one to go. The Financial Services Authority has already backed off and yesterday, the original complainant, James Middleweek, was persuaded to drop his allegations too. Little more than a year ago, Terry Smith, the combative chief executive of the City securities house, Collins Stewart, seemed to be on the ropes if not laid out on the canvas after a series of damaging allegations by a former employee went public. In a statement of claim for unfair dismissal, Mr Middleweek alleged all kinds of financial naughties, from insider dealing to market abuse.

There was, as Mr Smith recalls bitterly, a media frenzy and the Mail on Sunday even won an award for breaking the story. Now the self-styled whistle blower, in Mr Smith's book only a blackmailer all along who wanted to extract from him a multimillion-pound severance deal, has withdrawn all his allegations and claims. In return, Collins Stewart has dropped its case for defamation.

Yet there is still one heavy weight elephant that Mr Smith is still hunting - the Financial Times. The FT reprinted Mr Middleweek's allegations pretty much in full, believing that the document which carried them had qualified privilege. Thinking, not unreasonably, that the FT was out to get him, Mr Smith sued. This is one case he doesn't intend to settle out of court.

The FT has never relied in its defence on attempting to demonstrate that the allegations were true. Rather it contends that there was a public interest in airing what the Middleweek hullabaloo was all about. Regrettably for the FT, this looks an even more slender reed to cling to if the original allegations are now totally withdrawn. The hullabaloo, it seems, was about nothing at all, unless it was shut-up money.

Mr Smith is suing for special damages of £250m. Nobody believes he can win such a sum, which is based on the damage to the company's stock market value relative to peers when the allegations were published. But that still leaves the matter of general damages, and, as Mr Smith says, he won't be folding his tent until he's had satisfaction. The financial penalty may not, in the end, be very large, but I wouldn't fancy being in the FT's corner right now.

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