WH Smith dithers over rescue plan

Pressure is growing among institutional shareholders for the board of WH Smith to meet with Tim Waterstone and his advisers to discuss his controversial plans to re-invigorate the ailing retailer.

A groundswell of City opinion wants the WH Smith board to provide an evaluation of the waterstone offer. A shareholder said: "Could we not explore how the offer might work?"

The pressure comes following the emergence of Mr Waterstone's masterplan, which conflicts with the version reported by the board of Smith's when it rejected his overtures last week.

A spokesman for WH Smith said the board had no further comment to make about the offer. However, he conceded that, "in the hypothetical event of shareholders asking us to meet Mr Waterstone, we would listen to the shareholders."

WH Smith accused Mr Waterstone and his advisers of trying to enrich themselves at the expense of shareholders. Sources close to Mr Waterstone deny the charge. Among the objections raised by WH Smith was the prospect that a golden circle would get free warrants equal to five per cent of the share capital in the new company.

Chief executive, Richard Handover, who only took up the post on Wednesday, criticised the warrants for "giving away shareholders' rights". The terms of the warrants, however, show they set tough thresholds before they can be cashed in. They would be exercised in four equal tranches, dependent on gains of 20 per cent, 40 per cent, 60 per cent and 80 per cent in the shares of the new company. Ownership of the warrants would be spread between Mr Waterstone, SBC Warburg and, although this has not so far been revealed, the incumbent management.

Under Mr Waterstone's vision for reinvigorating WH Smith, chief executive Richard Handover would stay on as chief operating officer. Mr Handover took the top job following the departure of Bill Cockburn to BT.

Ian Martin, chairman of Unigate, would be appointed to the board as deputy chairman under the current chairman, Jeremy Handley, but in the expectation he would soon rise to be chairman after Mr Handley retires.

Sources close to Mr Waterstone's plans shot down claims that debt would total pounds 1bn. Of the pounds 1bn facility provided by SBC Warburg, pounds 600m would be used to fund the down-payment of a 200p a share offer to existing shareholders.

The remaining pounds 400m would be used as working capital, replacing WH Smith's pounds 350m of debt, and would appear only gradually on the balance sheet.

While that would entail gearing of between 100 per cent and 200 per cent, interest cover would be 3.7 times after earnings before interest, tax and depreciation.

Criticism from WH Smith of the level of fees to be earned by SBC Warburg is also refuted by Mr Waterstone's team. A figure of pounds 34m mentioned by WH Smith, it is said, failed to point out that of this, pounds 20m was a standard banking fee on the debt facility.

Corporate advisory fees would amount to 2.6 per cent of the value of the deal. This would amount to more than pounds 5m, but less than pounds 10m, or at least pounds 4m below WH Smith's figure.

Mr Waterstone was criticised by Mr Handover for his wish to inject his new retail concept, the Daisy and Tom kids chain, into the group. One source asked that if WH Smith was so critical, "why can't they generate higher returns in one of the wealthiest shopping areas in Britain?"

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