WH Smith investors question bid rejection

Tim Waterstone launched a charm offensive on WH Smith's institutional investors yesterday in an attempt to get his proposed bid for the beleaguered retailer back on the front foot. Yesterday he took his vision to heavyweight investors at the Prudential, Robert Fleming and Commercial Union and he is expected to discuss his plans with holders of more than 50 per cent of Smith's shares by Wednesday.

Although shareholders are still understood to be treating the Waterstone proposals warily, coming as they do just weeks after WH Smith installed Richard Handover as the company's new chief executive, the company is expected to come under increasing pressure this week to at least sit down with Mr Waterstone and discuss his plans.

A number said they felt WH Smith had acted hastily in rejecting Mr Waterstone's offer out of hand, especially in the light of the stock's poor recent performance. Questions were also raised about an apparent change of heart by Jeremy Hardie, WH Smith's chairman, who had been holding confidential talks with the Waterstone camp almost up until the proposals were rejected. A number of shareholders who were not on the original shortlist for meetings this week requested briefings.

Shareholders were told that, far from being the highly leveraged takeover portrayed by WH Smith last week, the deal will actually leave the acquisition vehicle with gearing of around 80 per cent and a much more efficient capital structure. As well as being offset against tax, the interest payments on the debt taken on to buy in around 60 per cent of the equity will be safely covered more than three times.

After handing shareholders 200p in cash, the earnings per remaining share are likely to emerge over the next 12 months at around 21p which, if valued at the same 11 times multiple currently applied to WH Smith's earnings, would imply a share price of 231p. Together with the 200p special dividend, that would imply a premium of around 16 per cent to the share price before news of the bid emerged.

As well as spelling out the financial considerations, Mr Waterstone was still attempting to sell his proposals yesterday on the back of his plans for transforming the core WH Smith retail chain, which he intends the current management team to implement under his guidance.

Richard Handover would be offered a job as chief operating officer with Mr Waterstone taking over the chief executive's role.