Waterstone set to regain book empire

Tim Waterstone looked set to regain control of his bookselling empire yesterday when it emerged that the music group EMI was in exclusive talks to buy Waterstone's from WH Smith and install the chain's entrepreneurial founder as chairman. The deal would create the UK's largest bookselling chain and enable WH Smith to return up to pounds 200m to shareholders.

EMI, which also owns the Dillons and HMV stores, confirmed it was considering a joint venture bid to buy Waterstone's in a deal that could value the chain at pounds 250m-pounds 300m. Though the statement did not mention Mr Waterstone by name it is understood that he would be non-executive chairman of a new company that would include Waterstone's, Dillons and HMV. Alan Giles, Waterstone's chief executive, would run the merged book division while Stuart MacAllister would remain in charge of HMV. It is thought that both the Waterstone's and Dillons names would be retained.

The deal would be sweet comeback for Mr Waterstone who failed last autumn in an audacious pounds 1bn offer for the whole WH Smith group. That approach was rejected and WH Smith, under Richard Handover, the new chief executive, announced a break-up plan to demerge Waterstone's and sell its interest in Our Price music. Waterstone's was due to be demerged in the spring.

Tim Waterstone is being backed by Advent, the venture capital group, while SBC Warburg Dillon Reed is advising EMI. SBC Warburg acted as Mr Waterstone's adviser during his approach to Smith's.

A trade sale would benefit Smiths as it would involve lower costs that a demerger which analysts originally suggested could value Waterstone's at up to pounds 350m.

It is now thought unlikely that Waterstone's management will attempt a buy-out of its own. Mr Giles and Mr Waterstone get along well and worked together for several months when Mr Giles was first placed in charge of the group.

EMI's interest in merging Dillons and Waterstone's is a result of its concerns that it does not have sufficient clout in a rapidly consolidating market.

Analysts feel the Waterstone's deal may ultimately be a way for EMI to reduce its exposure to books. They say the Dillons-Waterstone's combination may eventually be floated off as a separate company. "Overall, it seems to provide an exit for EMI to extract itself from the retailing end of the business to focus on its core of music publishing and recorded music," said Anthony de Larrinaga, media analyst at Panmure Gordon.

The merged company would have 450 stores (including HMV) and control 17 per cent of Britain's book market. WH Smith has a 15 per cent share. Analysts do not expect the deal to run into regulatory problems.

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