Analysis – Waterstone’s sets its sights on the Ottakar’s empire

A bidding war for the 137 store-strong Ottakar’s bookshop chain could break out after last week’s announcement by Waterstone’s owner HMV Group that it has entered preliminary talks to buy the company.

HMV’s interest in the chain comes less than two weeks after senior managers at the publicly listed Ottakar’s revealed they were planning a private equity-backed management buyout to take the chain private.

“A bid from HMV would blow the management buyout out of the water. Ottakar’s has the Waterstone’s infrastructure, so it has the potential to enhance HMV’s earnings while giving it greater domination of book retailing,” says Seymour Pierce analyst Richard Ratner.

Other players such as Borders, WH Smith or even US giant Barnes & Noble could enter the bidding. A trade buyer could offer a higher price for the chain than a private bidder, as it stands to reap greater cost-savings and synergies with its existing business.

However, Ratner thinks it is possible a HMV bid would be referred to regulatory authorities, since the Waterstone’s chain, with its 196 outlets, has a 17 per cent share of the UK’s &£1.6bn book market, according to Nielsen Bookdata. When added to Ottakar’s eight per cent, that would hit the 25 per cent mark that can spark a competition investigation.

If HMV or another trade buyer manages to seize control of the chain, valued by analysts at over &£80m, it would represent a further stage of consolidation in the UK book retailing market. Ottakar’s purchased the 24-store Hammicks chain two years ago, while Borders took over Books Etc in 1997 before opening its first store in the UK.

HMV would have to decide what to do with Ottakar’s, which has built its business through expanding in market towns around the UK. It could either convert all the stores to the Waterstone’s format, or run a dual-brand strategy. The two chains’ stores overlap in only 29 towns.

An Ottakar’s spokesman says the chain is positioned between the generalist appeal of WH Smith and the more academic Waterstone’s. “We are in the middle: more family-oriented and approachable than Waterstone’s,” he says.

The chain claims to combine the range and service of a national book chain with the autonomy of local bookshops, tailored to local communities. This may suggest HMV would benefit from operating a dual brand strategy, as Borders does with Books Etc.

Verdict analyst Andrea Cockram says Ottakar’s stores offer a high level of customer service and advice about books, unlike the supermarkets, which sell solely on price. “It would be a shame to throw that away,” she says.

In the year to January 29, Ottakar’s turnover increased 12.7 per cent to &£173.2m, with like-for-like sales up 3.5 per cent. Pre-tax profits increased by 15.9 per cent to &£7.1m.

Verdict estimates Waterstone’s average store size is 600sq m and in 2004 it earned some &£31 per sq m in sales against Ottakar’s &£27 per sq m from stores with an average size of 420sq m. WH Smith’s sales per sq m are &£41.

Founded in 1987 by James Heneage, managing director, and Philip Dunne, now chairman, Ottakar’s floated on the London Stock Exchange in 1998. It thrived while rival WH Smith was in disarray, but has found the going tough since WH Smith got its act together, the supermarket chains began competing aggressively on price and high street trading conditions became tougher. Online book retailing has added stiff competition.