I do feel sorry for Kate Swann, the reasonably new chief executive of WH Smith. She has achieved enough already in her retail career at Sainsbury’s and Argos not to need to be patronised by my sympathy – and she is certainly savvy enough to know that her new charge would be vulnerable to a bid in an improving economy. But, nevertheless, she will have wanted an opportunity to show her strategic stride.
This week’s interim results for WHS, another lacklustre affair after January’s profit warning on the back of a disastrous Christmas trading period, afforded Swann the chance to reveal what she intends to do about the situation. As it is, her parade has been rained upon by venture capitalist Permira’s near-£940m approach for WHS. Whatever her plans for the retailer, this set of results could turn out to be a Swann-song.
I don’t like self-evidently talented managers being taken out by opportunistic venture capitalists before they have even had a chance to perform. I fancy that many shareholders will take a similar view. That is probably why Permira has come in with a very fully valued initial bid for WHS, a premium of some 44 per cent over last Friday’s closing price of 260p. It will also be part of the reason why the venture capitalist doesn’t want to turn hostile and would prefer Swann and her board to recommend its offer.
Swann can, at least, show her mettle in this regard. In an initial meeting with Permira, at which it threw its weight around a bit, Swann was described as “frosty”. She can afford to be. She will know that shareholders backed her entrepreneurialism when she was appointed last November and they will need to be bribed out of their conviction that she is the best deliverer of value in the immediate term. If she delivers that value into an improving market, shareholders will know that they can command an even greater premium than Permira is offering for a change of ownership.
So Swann may yet be given her day in the sun. A large part of me hopes so. History shows that, in the long run, it is better for the retail economy if companies are turned around and traded into better performance than bartered in a series of shareholder-exits and re-floats. But, reluctantly, the better part of me acknowledges that there is an industrial logic to WHS striking a deal such as the one being offered by Permira.
This is partly to do with the precedents that are around for de-listing retailers from the public equities markets. Debenhams was taken private last year and Philip Green not only took Bhs and Arcadia private, but has become an outspoken apostle of the advantages of private over public ownership. Shoe retailer C&J Clark, which has resisted flotation in recent years, quietly revived its fortunes over the past decade and, I note, has just announced a 23 per cent increase in profits to £59.4m in its domestic market.
The private equity markets these days offer adequate access to capital investment, which used to be a principal reason for going public. Furthermore, being privately owned removes a company from the kinds of stresses and strains from institutional shareholders for maximum, short-term earnings growth that Green has so pithily railed against. In this context, being a publicly listed company has not served WHS well.
It needs a radical overhaul. It probably needs to sell the jewels in its crown, its press distribution and publishing arms. It could also dispose of its property portfolio and its Asia-Pacific business. This would go well over halfway to repaying the costs of Permira’s bid. But what has to be tackled most urgently for either WHS’s new or existing shareholders, is the core high street business. In a retail environment that offers a triple threat from superstores, specialists and online retailers, WHS struggles to compete both on product and price.
It’s always dangerous for someone like me to offer a consumer test. WHS may not be after customers like me – whatever that is – but I would also respectfully counter that it can’t afford to be too fussy. So here’s my take on it: WHS is a middle-class institution, but I am struck by how it fails to meet middle-class expectations. It’s good on education support materials. But if we want books, we go to Waterstone’s; if we want music, we go to HMV. If we want stationery, there’s Ryman’s. WHS cannot live as a news agency alone.
At the moment, WHS is the exception rather than the rule – it’s not our first choice for music or books. Swann will have to surmount this retailing conundrum with an entirely fresh offer to attract more customers. But I’ll tell you one thing: it would be much easier to tackle this problem in the private sector rather than as a publicly listed company.
George Pitcher is a partner at communications management consultancy Luther Pendragon