Waterstone's plans emerge
Sunday 12 October 1997
Mr Waterstone has already said he will sell off Smith's US businesses and the Virgin Our Price music chain, and refocus on books, newspapers and magazines and stationery. He has repeatedly said that a 4 per cent annual increase in sales will be enough to make his plan work.
To date, however, Mr Waterstone has held back from spelling out his financial targets for WH Smith. The company itself does not report profits on individual product lines. But estimates being used by Mr Waterstone's advisers suggest that last year sales of books by WH Smith generated gross margins of 13 per cent, stationery 9.5 per cent, news 6 per cent, and video and music 3 per cent, as was "other" which includes sweets and drinks.
Mr Waterstone wants to boost margins on books to 19 per cent, close to the 20 per cent achieved by the stores of his name which he set up, and which are now one of the most profitable parts of the Smith's empire.
Profit margins on news will be targeted to rise to 7.5 per cent, and stationery to a lucrative 17.5 per cent. Sweets and suchlike will be dropped from the WH Smith product range.
One part of the Waterstone blueprint for WH Smith calls for "Metro stores" - small, in-town, convenience shops with focused products. Metro stores in London, for example, will sell foreign newspapers and magazines.
Stationery will be relaunched specifically to compete against Rymans, which has made significant inroads into Smith's business in this area.
A WH Smith spokesman singled out Mr Waterstone's plan to scrap music and video for particular criticism. "We've got a very large market share in music and video," he said. "We're a major profitable player in those businesses."
Following the initial rebuff by the WH Smith board, Mr Waterstone's adviser, SBC Warburg Dillon Read, has come up with revised terms for his capital restructuring of the business. Shareholders were to have been paid 200p a share, together with a share in WH Smith NewCo, carrying about pounds 570m of new debt and geared at 80 per cent.
It is now expected that Mr Waterstone will drop the payout to between 125p and 150p a share, adding only around pounds 424m to the new company's balance sheet. Concern was also expressed at the implied value put on Tom and Daisy, a new children's store Mr Waterstone has set up, which he wants to put into WH Smith. The business is expected to be valued at pounds 10m - the capital invested in it to date - rather than the pounds 35m previously suggested.
The WH Smith board remains cool towards Mr Waterstone's proposals, but there are indications that shareholders want the business strategy he has put forward to be studied carefully. Smith's would be willing to meet Mr Waterstone if it was in the interest of shareholders. "The board has a fiduciary duty to its shareholders - it's as simple as that," a spokesman said.
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