The Investment Column: WH Smith board under pressure

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The Independent Online
Shareholders in WH Smith must wonder what has hit them in the last couple of weeks. After years of inaction coupled with a pathetic underperformance, their company has suddenly been caught up in a whirlwind of activity. Tim Waterstone deserves some credit for acting as catalyst for Smith's demerger plans even if Jeremy Hardie, Smith's chairman, insists a break-up was being considered all along.

There is no doubt that Mr Waterstone's plans, which included a high level of debt and the sale of the Virgin-Our Price and US businesses, had fundamental weaknesses. But the Smith plan has risks too. On the plus side it will mean a relatively unleveraged vehicle and the possibility of the proceeds of disposals such as Virgin Our Price and The Wall music operation in America being returned to shareholders.

But the real risk is in the demerger of Waterstone's. For a start there is the risk of margin erosion as the buying power will be reduced and costs may be higher. Second, an independent Waterstone's would surely be a sitting duck for takeover. And if it fell to a mass-market player like Barnes & Noble of the US, it could be "dumbed down" and taken into head-on competition with Smith. However, with Waterstone's potentially valued at pounds 300m or 100p per share, buying it would be a big leap for Barnes & Noble which would presumable have to pay a premium as well.

As ever, much depends on whether Smith can revitalise its core chain. Here is does seem as if Smith's management has stolen some of Waterstone's ideas. The decision to focus more on books, stationery and magazines does make sense, as does keeping the music and video operation which still has a sizeable market share

Whoever had the ideas first matters little to shareholders who stand to benefit anyway. Having been given an almighty prod by Mr Waterstone and its own shareholders, Richard Handover and co will be under pressure to deliver shareholder value.

If they fail, it will not be long before someone else has another tilt at it - possibly hostile next time. With analysts forecasting full-year profits of pounds 140m, Smith shares trade on a forward multiple of just 12. That seems cheap. After putting up with all the shenanigans of the last few years, Smith's shareholders should not sell now.