WH Smith joins race for AOL book publishing arm

WH Smith has joined the bid battle for the book publishing division of AOL Time Warner in a deal which could be worth £250m.

WH Smith wants to merge the business with its Hodder Headline publishing division which it acquired in 1999. AOL Time Warner's book division includes the Little, Brown and Warner Books imprints and is home to authors such as Iain Banks and Margaret Atwood.

Smith's has teamed up with CinVen, the venture capital group, to provide equity capital to fund the merger. Smith's, which has long been linked with a US publishing deal, said discussions were at a preliminary stage.

Hodder Headline has a share of about 7 per cent of the UK publishing market and has been successfully moving into "own brand" books on subjects such as cooking and gardening. Smith's said a deal with the Time Warner division would help create "one of the leading transatlantic publishers."

Smith's is likely to face competition from Penguin, part of the Pearson media empire, and from Frank H Pearl, the founder of Pegasus Books. ZelnickMedia, an investment company founded by Strauss Zelnick, the former chief executive of the Bertelsmann music division BMG, is also thought to be interested. Random House, part of Bertelsmann, is also thought to be in the running. HarperCollins, part of News Corporation, dropped out of the race earlier this week.

AOL is likely to move quickly on the deal as it seeks to cut its £18bn debt mountain.

In January shares in Smith's slumped to a 13-year low after the group announced a drop in underlying sales over Christmas. The company said it had made a deliberate decision not to match "kamikaze" pricing of CDs by supermarket rivals and concentrate on building margins instead.

Richard Handover, chief executive, also admitted that an advertising campaign, which focused on brand-building rather than specific products, had not been successful.

Book sales in the Christmas period were down by 3 per cent on the previous year. This was largely in fiction where arch-rival Waterstone's ran strong promotions.

The group's US retail operations have been struggling as the stores are based in hotels and airports where sales have suffered since the 11 September attacks.

Separately AOL Time Warner is reported to be increasing efforts to sell its CD and DVD manufacturing division of its Warner Music subsidiary. Warner Music is one of the music labels linked with a possible merger with the UK's EMI.

WH Smith shares closed 0.25p higher at 246.25p, though its announcement was issued after the market had closed.