Waterstone's future "to be resolved in weeks"

Waterstone's future "to be resolved in weeks"

The future of Waterstone's is expected to be resolved in the next four weeks, with speculation mounting that managing director Dominic Myers could lead a management buyout.

Parent HMV Group effectively put the business up for sale this morning after announcing it was seeking "strategic options" for both Waterstone's and HMV Canada.

City analysts said HMV Group's hand has been forced by the need to satisfy a bank covenant test by its year-end by the end of next month. HMV Group announced earlier this month it was likely to break its covenant tests. Nick Bubb, analyst at Arden Partners, said: "In terms of dealing with the debt, the HMV Group needs to either sell Waterstone's or 7 Digital as well, which is probably worth £10-20million, or raise a very big rights issue."

He added: "The year end is a month away which is why there has been speculation about a bank covenant test. In the next few weeks something has to happen—they will have to raise the money somehow."

Waterstone's has been valued at between £50m and £70m although one observer said he believed the final price of the chain could be much lower. He pointed out suggestions made when Borders UK was put up for sale in 2007 that the retailer could be bought for as much as £60m. It was finally bought by Luke Johnson's Risk Capital Partners for an initial £10m plus £10m based on sales performance.

Publishers contacted by The Bookseller were pessimistic about a possible bid by the chain's founder, Tim Waterstone, who is believed to be investigating a takeover with Russian billionaire Alexander Mamut, who has a 6.1% stake in HMV Group. One said: "The market has moved on from the vision of the Tim Waterstone bookshop. The key thing is what this means for specialist bookshops. I hope someone sensible takes over to keep it going. It's massively important what they do for the book trade."

Instead, publishers said they believed Dominic Myers would launch a management buyout himself, pointing out the recent hire of Michael Neil as Waterstone's new commercial director. Neil previously worked with Myers when the latter was m.d. of Blackwell. One said: "Why would Michael leave his job at Bertrams unless he believed there was some m.b.o. activity potential?"

However, the observer was sceptical that a management buyout would be an easy answer for the chain. He said: "So much depends on the investor and their plans for the business. Waterstone's needs someone willing to invest in growth for the business, not asset strip."

If Myers was not to launch an m.b.o., publishers were keen for him and Neil to remain in charge of the book chain. One said: "Dominic is a good person to have at the top and Michael knows the UK retail environment, knows the publishers and suppliers. Not having continuity of senior management would not be helpful for the business."

Tim Hely-Hutchinson, c.e.o. of Hachette UK, said: "My colleagues and I very much hope that Waterstone's and particularly all the dedicated people who work for the company will find themselves in supportive ownership without an excessive period of uncertainty."

Publishers were sympathetic to Waterstone's current position, saying it had been dealt a poor hand by previous management. One publishing m.d. said: "There was no meaningful investment in an online offer when they could have carved out a niche for themselves. Under Gerry Johnson, they could have done more with digital reading, similar to what Barnes & Noble did with their Nook. There was a real opportunity for a mid-market e-book reader device, somewhere between the iPad and the Kindle."

If Waterstone's was to be taken over by new management, publishers said it was likely a more extensive store closure plan would follow, with suggestions it should shrink to around 200 stores from its existing portfolio of more than 300. One said: "Another question for them in the long term is who is their consumer and what sort of brand would appeal?

"Specialist booksellers are great at catering to their own customer but the same customers have been shopping there for years. The question is how do they get new ones in, because for a specialist that is the key challenge. It's a very hard task but not impossible. Waterstone's brand is strong but can be quite daunting for a lot of people outside of the book world or regular book readers/buyers."

Another publishing m.d. added: "Waterstone's is the shop window [for the whole trade]—we need a specialist chain on the high street— it'll be two or three years before digital takes up the slack."

Both Bubb at Arden Partners and Freddie George, analyst at Seymour Pierce, said the group was prompted to make its 9:30am announcement to the City after its share price rose following a story on Sky News last night in which reporter Mark Kleinman said that Hilco was interested in buying HMV Canada.

HMV timeline

30th June 2009

Total group sales growth of 4.4% for 2009
HMV UK & Ireland like for like sales up 1.9%.
Waterstone's like for like sales down 3.8%
Profit before tax and exceptional items up 11.5% to £63.0m

11th December 2009
Total sales £797.0m (2008: £754.5m), up 5.6% for six month period
HMV UK & Ireland total sales up 12.8%, including like for like sales up 1.6%
Waterstone's total sales down 4.3%. Like for like sales down 5.1%
Underlying net debt increased by £14.5m to £88.1m (2008: £73.6m), primarily reflecting acquisition of 7digital.
14th January 2010

Myers appointed.
30th June 2010

Total group sales growth of 3.1%, resulting in record sales in excess of £2bn for 2010
HMV UK & Ireland like for like sales down 2.4% Waterstone's like for like sales down 6.2%
Net debt at £67.6m (2009: £6.5m), reflecting cost of acquisitions during the year

December 2010

Total sales £749.5m (2009: £797.0m), down 6.0% for six month period
HMV UK & Ireland total sales down 15.3%, including like for like sales down 16.1%
Waterstone's total sales down 2.4%. Like for like sales down 3.2%
Underlying net debt of £151.6m (2009: £88.1m)

5th January

Total group sales down 11.9% during Christmas
HMV UK and Ireland like-for-like down 13.6%. Waterstone's like-for-like and total sales down 0.4%
Group will close 60 stores – 40 HMV and 20 Waterstone's and added: “Compliance with the April covenant test under the group's bank facility will be tight" after trade was “significantly undermined by severe weather in the UK”.
6th January

HMV Group insists Waterstone's is “not for sale”.
19th January

Group forced to admit credit insurers are reviewing the level of cover they provide
20th January

Analysts renew call for break up of HMV Group

25th January

More than 1,000 jobs to go across HMV Group.

31st January

Waterstone's asks publishers to scale back March orders to reduce number of returns.
4th February

Russian tycoon Alexander Mamut hires Credit Suisse to advise him on options.
1st March

HMV Group says it expects to breach bank covenant test in April, net debt would be at least £130m and full-year profits will be below expected £45m.

25th March

HMV Group announces it is “pursuing strategic options” for Waterstone's.

30th April

Year-end results and covenant tests.

June 2011

Audited full-year results and bank covenant tests