The details of Mr Waterstone's revised proposals were issued by WH Smith yesterday after it was forced to make a statement by the Takeover Panel which now deems the struggling retailer to be in a takeover situation.
However, the terms included a clause which stated that the proposals would proceed only if recommended by the WH Smith board. This leaves the door open to the Waterstone team to launch a bid for the group if the Smith board decides to snub Mr Waterstone a second time.
Nick Bubb, an analyst with Societe Generale Strauss Turnbull, said: "It is a better set of proposals but it still looks a long shot that it will get the board's backing. But Waterstone may well go over their heads to the shareholders."
Mr Bubb said it was possible that a hostile bid could prove successful.
WH Smith executives will meet some of its institutional shareholders today and tomorrow amid growing feelings that the Waterstone proposals should be put to all shareholders. Some believe that it would be arrogant of the board to reject the proposals ahead of the group's annual meeting next Wednesday.
The terms of the Waterstone proposals were put to Jeremy Hardie, the WH Smith chairman, and Richard Handover, its chief executive, yesterday afternoon by Mr Waterstone and Ian Martin, the Unigate chairman.
Under the revised deal, WH Smith shareholders would receive a payout of 150p-200p per share rather than the 200p originally proposed.
This would reduce the gearing of the new leveraged Smith's from over 80 per cent under the original terms, to around 60 per cent.
A further payment may be made to shareholders following the possible sale of some parts of the business. These could include the Virgin Our Price music chain and the US business. It would report on these disposals by the end of March.
Another key difference in the new plan is that Mr Handover would retain his position as chief executive. Tim Waterstone would be executive deputy chairman with Mr Martin as chairman. There would be no place on the board for current chairman Jeremy Hardie. The changes were viewed as a way of getting Mr Handover "on side" to help achieve the board's approval
A strategy committee consisting of Mr Martin, Mr Waterstone, Mr Handover and Keith Hammill, the group's finance director, would be in charge of the new group's future direction and disposals.
Mr Waterstone would be in charge of repositioning the core WH Smith retail format with a new brand WH Smith Metro. This would be rolled out to 370 stores over three years. They would concentrate on authoritative offerings in books, stationery and news.
The Swindon warehouse would be closed while 10 of the larger Smith branches would be converted to Waterstone megastores along the lines of the new outlet in Glasgow.
Under the new plans, the new holding company would acquire Daisy & Tom, Mr Waterstone's childrens store, for pounds 9.7m with additional payments dependent on performance.
The new plans also see the up-front expenses of the fees limited to pounds 15m. SBC Warburg, Mr Waterstone's backers, would accept part of its fees in performance warrants.