WH Smith backs down and agrees to meet Waterstone

The embattled retailer WH Smith has agreed to sit down with Tim Waterstone early this week to discuss his revised proposals for its restructuring, probably tomorrow. Tom Stevenson reports on the change of heart at Smiths.

The latest unexpected twist in the saga marks a substantial climb-down by Smiths' executive directors, led by Richard Handover, chief executive, and Keith Hammill, finance director. Throughout last week the two executives insisted Mr Waterstone's proposals to install himself as chief executive of Smiths and gear it up with more debt were wholly without merit.

The decision to meet follows a week of briefings of institutional investors by the Waterstone camp which persuaded some shareholders to press the board into entering negotiations.

Mr Waterstone's plans, which originally envisaged a 200p-per-share payout to shareholders, funded by almost pounds 600m of new debt, were being refined over the weekend by Waterstone's adviser SBC Warburg to meet investors' concerns.

The new proposals to be discussed tomorrow will see a lower payout to shareholders of between 125p and 150p. They will also receive shares in a new company with around pounds 400m of new debt. That will soothe fears that Mr Waterstone was planning to add too much financial gearing to the company's already high operational indebtedness.

It also emerged over the weekend that WH Smith's four non-executive directors were not present at the meeting almost two weeks ago at which it was decided to reject Mr Waterstone's initial approach.

Mr Handover was originally quoted as saying the whole board was present at the meeting and was unanimous in its rejection of the takeover proposals.

According to one non-executive director, none of Martin Taylor, chief executive of Barclays, Marjorie Scardino from Pearson, Patrick Lupo and Michael Orr had attended.

WH Smith has denied strongly any dissent among its board members over the decision, but stories were circulating at the weekend that Jeremy Hardie, the non-executive chairman who first discussed the proposals with Tim Waterstone, is likely to be replaced.

The past two weeks have been an extraordinary baptism of fire for Smith's new chief executive, Richard Handover, who announced Mr Waterstone's approach and the board's rejection of it on his first day in the top job. He has been with the group for 26 years, but was only recently named as successor to Bill Cockburn, who quit unexpectedly after just 18 months.

It was widely suspected that WH Smith had tried and failed to find a suitable outsider to take on the job before turning to Mr Handover. But it is still thought likely that shareholders will back his fresh attempt to rejuvenate the underperforming retailer.

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