WH Smith pays pounds 185m for le Carre publisher

WH SMITH GROUP, the country's largest books retailer, yesterday unveiled an agreed pounds 185m takeover of Hodder Headline, the UK publisher of best-selling authors John le Carre and Stephen King.

The deal will see Hodder founder and chief-executive Tim Hely Hutchison net pounds 4m. Hodder, set up with venture capital funds in 1986, floated on the London stock market for pounds 11m in 1991.

WH Smith will pay 525p per share for Hodder, representing a premium of 43 per cent from Friday's closing price. Hodder stock surged 41 per cent, or 147.5p to close at 515p. However, scepticism in some City quarters about the deal's near-term merits for WH Smith saw the retailer's share price slide 4.8 per cent, or 32.5p, to 639.5p.

Hodder, the owner of imprints such as Hodder & Stoughton and the "Teach Yourself" series, is also a major non-fiction publisher with books by cricket umpire Dickie Bird and celebrity chef Sophie Grigson. It has achieved notable success in cracking UK best-seller lists.

"It focuses on books, our ability to leverage the brand and on finding new ways to market," said WH Smith chief executive Richard Handover. "We believe that ownership of content provision is going to be very, very important."

The acquisition follows the January pounds 5.6m takeover of Helicon Publishing, publisher of Hutchison Encyclopedia and other reference works.

Mr Handover sought to minimise competition concerns about WH Smith owning Britain's third largest book publisher and acknowledged the need for transparency in the retailer's relationship with Hodder, particularly in the pricing and marketing of new titles.

Hodder has an 8.5 per cent share of the UK consumer publishing market and 6.4 per cent of the total UK market. WH Smith has about 17.5 per cent of the UK bookselling market.

WH Smith estimated a pounds 2m pre-tax profit gain, largely from lower distribution costs and ending Hodder's stock exchange listing, in the first full year of operations. That doesn't include any benefits from future revenue growth arising from joining the companies, analysts said.

"We don't like it at all," said one analyst. "The post tax return on capital makes it dilutive, nor do we think it solves the strategic problem they've identified of creating an enhanced product brand at an acceptable price."

Mr Handover, defending the takeover, said it will help build the retailer's Internet Bookshop and boost WH Smith Online, the free Internet portal service launched in April.

WH Smith also plans to start selling books in September over Open, the interactive digital TV venture controlled by British Sky Broadcasting and British Telecom.

Despite the cool response, Mr Handover defended the move to vertically integrate Hodder's publishing operations with WH Smith's retailing business. "You're going to see all kinds of structures involving publishers," he said. Mr Handover predicted Internet book sales, currently 2 per cent of the UK market, will hit 10 per cent within three years.

SG Securities analyst Ashley Thomas said enlarging the number of own- brand books could boost profit margins by 10 per cent. He expects brand sales to rise from 16 per cent of total sales to 25 per cent over three years, boosting earnings by pounds 15m in the process. Outlook, page 21

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