EMI looks at buying Waterstone's

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Dillons and Waterstone's could be merged to form Britain's largest bookseller under a deal being considered by EMI, owner of the Dillons chain.

EMI is interested in buying Waterstone's to help enhance its position in the UK book market, which is entering a period of consolidation as overseas operators move in. The media group, which reports its half-year results tomorrow, has contacted WH Smith for details on the chain but has yet to make an offer. If it succeeds, it would create Britain's largest bookseller with an 18 per cent share.

Dillons has been improving since EMI acquired the chain for pounds 36m from the receivers to the collapsed Pentos empire in March 1995. It is now making undisclosed profits on sales last year of pounds 139.4m. However, book industry experts say that, though the business has been stabilised and the portfolio improved, Dillons needs greater scale if it is to make headway in an international market.

It is understood that EMI, which operates Dillons through its HMV music chain, fears American interest in Waterstone's could spark an auction for the group. Analysts value the chain at pounds 300m to pounds 350m. Overseas interest is expected from Barnes & Noble, the American book superstore retailer, and Borders, the US group which paid an estimated pounds 40m for Books etc in September.

If EMI misses out on Waterstone's, it may be tempted to sell Dillons rather than battle on in a competitive market. Though it is thought EMI has no plans to sell, Dillons would now be worth more than pounds 100m, three times what EMI paid for it and would realise value for shareholders at a time when its music business is going through a tough time.