Outlook: Hodder on the block at besieged WH Smith

Abbey National; Sony/MGM
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The Independent Online

Kate Swann, chief executive of WH Smith, had little option but to allow Permira its due diligence. To have refused would have laid her open to the charge of frustrating a bid that shareholders might have wanted. Furthermore, by allowing Permira in to see the books, she might generate an auction. There are lots of others, private equity and trade, running their slide rules over WH Smith.

Yet despite the considerable amount of money Ms Swann stands to pocket should the venture capital group's 375p indicative offer eventually succeed, she's desperate for the chance to prove herself at the helm of the troubled high street retailer, and it is plain that if she could tell Permira to get lost, she most certainly would.

Unfortunately, there wasn't much sign of a worthwhile defence in yesterday's interim profits statement. The figures were grim, and although Ms Swann seems to be making many of the right noises about the future, her turnaround plans are at an early stage. However effective they eventually prove to be, it's going to be an awfully long haul.

Even so, she has got one of two things going for her. One of the most important is that the big City institutions are starting to believe they've had their pockets felt once too often by the private equity bandwagon, particularly in the retail sector, where the whole high street seems to be going progressively private.

Permira's price may look good compared to where the shares stood a few weeks back, but on any long term view, it's a pathetically low valuation. WH Smith may prove to be the private equity bid that finally draws a line in the sand. Many fund managers are being made to feel ashamed of their bonus driven short termism. Ms Swann is an opportunity to test run a different approach.

Even so, she'll have to do a lot more to deliver immediate value if she's going to succeed. One very obvious way of doing so would be to sell the Hodder Headline book publishing business and the news distribution arm. This is, after all, what any successful private equity bidder would do. Lagardère, the French publishing group, is keen to buy Hodder. WH Smith has failed in the past to sell the news distribution business, but that was only because the sale was mishandled. It doesn't have to be a second time.

Together, the two businesses might be worth as much as £400m, or 160p a share. Any such return of capital might buy Ms Swann the time she needs to make the core, high street retailing business start firing on all cylinders again.

Abbey National

Luqman Arnold, or Mr Luqman as many shareholders insisted on calling the Abbey National chief executive at the company's annual meeting yesterday, must have been expecting an earful, and that's precisely what he got. Fourteen months into the mortgage lender's turnaround strategy and there's still more bad news than good to announce.

The latest dollop of it is that despite a hugely costly restructuring, trading in the core retail deposit and lending business is still weaker than Abbey had been hoping for. Yet beneath the headlines, there's good reason to believe Mr Arnold's forecast of clear signs of improvement by the end of the second half might be vindicated.

The latest bad news first. There are three underlying causes. The first is that the revenues Abbey derives from early redemption of mortgages are running lower than expected. For the longer term, this is actually rather a good sign, for it means that fewer people are cashing in their Abbey mortgages early than had been the case. A second factor is that all the negative publicity surrounding Abbey has caused a falloff in sales of investment products. The third, and perhaps most important reason, is that Abbey has been forced to trim its standard variable mortgage rate by 35 basis points in order to make it competitive with leading rivals.

With this so called "back book" problem now fully addressed, Mr Arnold believes he has established a solid grounding from which he can rebuild. The net margin between average deposit and lending rates will continue to deteriorate in the second half, but at a much slower pace than hitherto. For mortgages at least, the steady erosion of market share ought to come to an end.

In June, many aspects of Mr Arnold's programme of change draw to a conclusion, including the staff retraining initiatives that lie at the heart of Abbey's strategy for generating renewed top line growth. Less training means more employees behind their desks generating income.

With the shares once again close to ten year lows, the jury is still very much out on whether Mr Arnold can succeed. The difficulty the stock market has in putting a reliable valuation on Abbey is that the company still has little idea of how much capital it needs to fund its business, and how much from disposals might therefore be available to return to shareholders. There's also little visibility on the trajectory of Abbey's recovery.

Only one thing remains clear. Mr Arnold has to make the turnaround succeed, for there is little likelihood of a takeover bid to put Abbey out of its misery. Those who would like to bid and could produce the synergies to justify a decent price - Royal Bank of Scotland Group for one - would be disallowed by the competition authorities, while for those with no such competition hurdles to surmount - say a big overseas bank - Abbey continues to look expensive, even at today's depressed share price.

Sony/MGM

Metro-Goldwyn-Mayer is the rebecca Loos of Hollywood. Over the years, the movie studio has opened its books to just about every potential bidder in town. Yet each successive, casting couch tryst has come to nought. Could Sony be MGM's David Beckham? Sony's US chief, Sir Howard Stringer, was vigorously playing down the story yesterday, but perhaps significantly, he wasn't denying the liaison outright.

Sony was taken for a ride when it first bought into Hollywood more than a decade ago with the acquisition of Columbia Pictures. It's Japanese masters could never get their heads round tinsel town's unique way of doing business - more shark pool than Sumo wrestling ring - and their vision of a unified consumer electronics and entertainment group fast degenerated into a dysfunctional conglomerate.

In recent years, the two halves have seemed to be in positive conflict, with developments in digital consumer electronics cannibalising the profitability of the music interests. There is some evidence of the same thing happening in movies. While Sony's music interests have been screaming blue murder about digital and physical piracy, its consumer electronics factories have been churning out the MP3 players and CD burners that make it all possible.

None the less, Sony has stuck with the script and Sir Howard, a Welshman by origin who made his name in American television, has made a pretty good fist out of the entertainment interests Sony has doggedly insisted on keeping. The big question is whether Tokyo really wants to get deeper into an industry on which it has already lost a fortune and which has proved to have little in common with Sony's core electronics business, or whether the true aim is to pull further away from it.

Sony has chosen to address the well documented troubles of its music interests by attempting a consolidating merger with BMG, which would see Sony and Bertelsmann emerge as joint venture partners in a larger and hopefully more profitable whole. The MGM bid is said by those familiar with the talks to be in conjunction with private equity partners, so it is possible that something similar is being planned for movies. Sir Howard, normally a gloriously indiscreet raconteur, is for once proving as inscrutable as his Japanese employers.

jeremy.warner@independent.co.uk

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