Investors press WH Smith to meet Waterstone

Institutional pressure yesterday continued to drive WH Smith to a meeting with its would-be chief executive, Tim Waterstone. Tom Stevenson, Financial Editor, reports on the high-stakes poker game between the retailer and its ambitious nemesis.

A meeting between Tim Waterstone and WH Smith's board moved closer yesterday after some of the retailer's biggest shareholders told the company they disagreed with its blanket rejection of last week's takeover proposals.

It also emerged that the Waterstone camp, together with its advisers at SBC Warburg Dillon Read, were preparing a compromise proposal that would attempt to soothe investors' concerns about the level of borrowings proposed for Mr Waterstone's takeover vehicle.

The takeover team is also understood to be preparing a more flexible position on what has emerged as a further sticking point with a number of shareholders, the valuation attributed to Mr Waterstone's private retail concept, Daisy & Tom, which would be taken over by WH Smith as part of the deal.

Up to one-half of WH Smith's top investors are thought to favour a rapprochement between the two sides and have approached the company or its broker, Cazenove, to insist a meeting should take place. Jeremy Hardie, the chairman of Smiths, who has remained silent on the proposals since they were rejected, is thought likely to be a prominent figure in the renewed discussions.

WH Smith restated its rejection of Mr Waterstone's proposals yesterday and said it had no intention of meeting with its former employee. Despite the rising groundswell of opinion against its stance, the company has refused to deviate from its line that Mr Waterstone's proposals offer nothing worth discussing.

Mr Waterstone approached Mr Hardie 10 days ago with proposals that would see him replace Richard Handover as chief executive of the stationery, music and books retailer. He believed he was involved in confidential talks until a pre-emptive rejection by the retailer last Thursday put the bid on to the back foot.

The SBC Warburg-devised plan would have seen around pounds 600m of debt taken on by the company to fund a 200p handout to shareholders, the sale of the Our Price record chain and WH Smith's US operations, and a radical overhaul of the core high street chain.

Institutions seen by the Waterstone team this week are understood to have been interested in the planned changes, but some have expressed concern about an injection of debt that would see gearing rise to about 80 per cent of shareholders' funds. They are also concerned that Daisy & Tom, which recently started trading from one shop on London's King's Road, is to be acquired in exchange for too big a shareholding in the new company.

Although Warburgs believes the injection of pounds 600m of borrowings would create the most efficient capital structure for the cash-generative retailer, it is thought to be drawing up a new proposal which would see less than 200p a share being handed back to shareholders. It is also looking at plans to make any acquisition of Daisy & Tom less reliant on an up-front payment and more on an earnout which would only cost WH Smith shareholders if the concept proved successful.

Not all WH Smith's shareholders were enthusiastic about change. One leading investor said he retained doubts about the bookseller's ability to run a business of WH Smith's size. He welcomed the approach, however, for the galvanising effect it was likely to have on the company's new management.

The retailer's shares closed 5.5p lower yesterday at 386p, but are trading around 20p higher than before Mr Waterstone's approach was publicised.