Waterstone bid could galvanise WH Smith’s stationary position

So there really is a chance of a peaceful solution to the long-running troubles. At last, the warring factions are to sit at the same negotiating table. The talks about talks are over, issues of proximity are put to one side and, in a truly landmark moment in the history of our nation, the board of WH Smith this week is to talk business with Tim Waterstone.

Until very recently, WH Smith would have had us believe that Waterstone was Britain’s number one corporate terrorist, was top of its not-wanted list and not a man to do business with under any circumstances – even were he to renounce violence and de-commission SBC Warburg.

Now, apparently, WH Smith is willing to accept that Waterstone wants to reach a resolution of the conflict through broadly peaceful means and is doubtless ready to stay at the talks until Waterstone is sick of the sight of its directors. For his part, Waterstone presumably reserves the right to return to violence with a hostile bid.

There are a few things to say about this peace process that have not, so far as I am aware, been said elsewhere. The first is that Waterstone’s position is, at first sight, not unlike that of Andrew Regan, who earlier this year endeavoured to unveil an audacious, some might say ludicrous, bid for the Co-op.

Both Waterstone and Regan have established reputations as whizz-kids (though in Waterstone’s case, at 58, the term is perhaps wozz-kid) on the back of making themselves moderate sums of money in entrepreneurial terms – Regan by trousering some 3m from selling on an unwanted lump of the Co-op; Waterstone by selling his eponymous retailer to WH Smith in 1989 for 49m, netting about 9m for himself.

Both organised vast lines of credit with the City – oddly enough, they both appear to have required about 1bn, a nicely rounded number – monstrously leveraged against the supposed value of what they intended to acquire. And both wanted to shake up what they perceived to be tired, old, underperforming managements.

But, of course, there is one crucial difference between Waterstone and Regan. Waterstone’s book chain may have been only minimally profitable at the time of its sale to WH Smith and these days, at some 20m, contributes about one-sixth of group earnings, but it was built on its founder’s vision, daring and retail intuition. Waterstone can run things. It’s unclear whether Regan has ever run a bath.

This could lead one to suggest that, had Waterstone offered himself as chief executive to WH Smith in the wake of Bill Cockburn’s precipitate departure to BT, everyone would have been considerably better disposed to him. As it is, he is cast as some sort of corporate raider in the, well, Regan mould.

This may suit the purposes of what commentators almost universally call WH Smug. It appears that the Smuggies blew the lid off talks with Waterstone precisely to have him cast in this role. Poor Waterstone was then left to make his case for restructuring and re-investment in WH Smith from the position of a raider, rather than of a runner.

That may not be entirely unfair on Waterstone. The deal he has been exploring with WH Smith was hardly just a radical new strategy for development, as might be presented to the board by a new chief executive. Like Regan’s proposed cash bribe to the owners of the Co-op, Waterstone’s idea was a 2 cash inducement to WH Smith’s shareholders, plus a stake in the debt-laden new company formed by the takeover.

His plan, in broad terms, was for the company to concentrate on popular books, for example for gardeners and children; to revamp WH Smith’s stationery offer; to develop speciality news and magazines and to sell off video and music interests. Apart from the last bit, there is nothing even vaguely radical about this strategy. Waterstone might have cracked it as chief executive, had he been offered the job.

So I suspect that he may have rather more radical plans up his sleeve. Of course, it has to be said that doing it well would be a radical concept at WH Smith. But what Waterstone may have grasped is that no one is going to change WH Smith for the better and for the long term on a salary and a few share options. Where a management culture is so deeply entrenched, there needs to be a change in ownership that delivers a clear mandate for change. Cockburn may have discovered this too late and to his cost. For Waterstone, it could mean only one thing – an out-and-out takeover.

There are self-serving aspects to Waterstone’s ambitions, among them the proposal to reverse his nascent Daisy & Tom children’s chain into WH Smith at a very generous valuation. But WH Smith’s shareholders have little to lose and possibly much to gain by giving Waterstone his head.

Finally, Waterstone bears one more similarity to Regan. He has demonstrated to other potential bidders that the only way forward for an organisation grown weak on its own fat is a takeover. The sadness is that a Tesco, an Asda or a Kingfisher may now come in with a tastier bid. The difference between the two is that Regan deserved to fail. Waterstone does not.


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