A whale of a tale

It is not silly season, but the Wall Street Journal’s scoop that W H Smith was the mystery bidder for the US bookselling giant Barnes & Noble feels like something someone made up. Still, stranger things have happened. When Fourth Estate managed a cheeky reverse takeover of HarperCollins in 2000 (the small indie’s then-m.d. Victoria Barnsley taking on the top job at HC UK), the agent Ed Victor remarked that he’d seen a whale swallow a whale, a whale swallow a minnow, but never before had he seen a minnow swallow a whale. Quite what he would have made of WHS buying B&N is anyone’s guess: two whales hoping to become a minnow?

A touch cruel perhaps. While much of our attention in book retail in the UK has been focused on the turnaround of Waterstones and the improving situation for indies, WHS, under its gruff but generally well-liked c.e.o. Steve Clarke, has been quietly surviving on a high street that has long-since done for other mixed-multiples such as Woolworths, Borders, Fopp, Virgin and John Menzies. When Clarke took over from his predecessor Kate Swann, he probably felt he had one job—to keep it alive. However, in securing its future, more has been achieved than has been acknowledged (including in this journal). As the FT noted, whereas shares in B&N have dropped 75% in the past 12 years, giving it a market capitalisation of less than $500m, W H Smith’s have risen more than fivefold, to value it at £2.1bn—roughly two times turnover.

Rather like B&N, WHS gets a bad rap from publishers for the state of its stores, and in the UK in particular over the fees charged on book promotions when compared with the books sold—a hangover, in fact, from the pre-Clarke era, when WHS’ profits increased each financial reporting period, but sales did not.

In truth, squeezing more from less was—for a period at least—not a bad strategy, but even so it’s hardly a long-term bet. Twelve years ago, WHS’ high street sales were £1.1bn, returning a profit of £43m; its sales are now half what they were, but its profit has improved 50%. Its Travel division, of which I hear nothing but good reports, has overtaken it in size, margin and raison d’être.

WHS hasn’t fessed up to its transatlantic overtures, but does say that it spent £2m on acquisition costs outside the UK which it "chose not to complete" (B&N’s former c.e.o. Demos Parneros is accused in ongoing litigation of having "sabotaged" the deal). Instead, just last week WHS spent $200m on travel retailer InMotion, which sells digital accessories in US airports—a deal it funded through increased borrowing. It would likely need to borrow again if it went back in for B&N.

An ambitious WHS is good news for the trade, particularly if it keeps investors onside and keeps WHS’ hands off its nearer competitor Waterstones. However, publishers might be nervous of anything that distracts from the core business and the necessary store improvements still required on the high street. A half-decent website would not be a disastrous investment either.

While the idea of WHS rescuing B&N might seem a bit far-fetched, only one of these whales is currently beached.