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Investment in the Waterstones’ website, the Hub and growing its related product range are key priorities for the business under its new ownership, chief executive James Daunt has revealed.
A week on from the sale of a majority stake in the 36-year-old chain to the private equity owners Elliott Advisors from Russian oligarch Alexander Mamut, Daunt said his aims for the firm included continuing to improve bookselling, developing its Café W brand, investing in the estate and opening new stores.
“(Our priorities are to) improve our bookshops through better bookselling and a better selection of books; improve also the selling of things that are not books – these can make bookshops more interesting and compelling, as well as make us more money; run more efficient and more alluring cafes; and improve the estate, both through investment in existing shops and through opening new ones,” he said. “Beyond the shops and our booksellers, invest in our website, in our IT infrastructure and in our logistics, especially The Hub.”
He said staff were pleased the company was seen to be “attractive” to investors and added: “There is a perception that the new owner will wish to see growth and that this is good news.”
Mamut had bought the company from the HMV Group in 2011 for £53m and invested over £100m on refurbishing the chain to turn it around, eventually seeing the company return to profit for the first time in five years in 2016.
In terms of whether the chain requires more investment on this scale, Daunt said: “We are now profitable and generate considerable free cash flow. It should be more than sufficient for any investment needs we might identify.”
New York-based Elliott Management oversees £22bn ($31bn) in assets and often targets companies where stock is perceived to be undervalued, encouraging changes in leadership, spin-offs or share buybacks in order to increase the value for existing stockholders. In recent years it has turned its attention increasingly to Britain with involvement in Game Digital, which it sold last month, as well as collapsed retailer Comet.
While it has recently shifted towards acting as a private equity business rather than an activist shareholder, analysts have told The Bookseller the reason for Elliott’s acquisition of the company are “not obvious”.
Douglas McCabe, c.e.o. at Enders Analysis, said: “If you were to list the ideal owners of Waterstones I am not sure anyone would have come up with Elliott, despite the optimistic public comments by James Daunt, and assurances regarding the leadership team and store openings.”
Refinancing debt appears a more likely option, McCabe said. “The debt can be refinanced to grow value and, the industry should hope, investment cash for the business."
Waterstones’ UK operating company had net debt of about £55m in 2017, mostly owed to a holding company at interest rates in excess of 7%. Interest on these loans was more than £5m, so new loans at lower rates would boost profit and free cash flow.
Speaking to the Financial Times, one veteran private equity turnround investor said the main attraction for Elliott was likely to have been the price. “They bought it cheaply because everyone thinks Amazon will rule the world. But Elliott probably took the view that there is room for the last man standing — and Waterstones has proven that it is a viable business by generating healthy earnings,” he told the newspaper. “They probably took the view that if Amazon was going to kill Waterstones, it would have done so by now.”
Independent retail analyst Nick Bubb described Elliott as “an odd buyer” and said private equity companies usually like to drive a turnaround and then move on after two or three years, and suggested the retailer might expand internationally.
“But in this case the turnaround has already happened under Mamut and Daunt, with the business now back into useful profitability. It’s not obvious where the growth comes from now for Waterstones, or what the potential exit route will be for Elliott. More UK new store openings look unlikely, so it may be that they’re thinking of overseas expansion, but that is always risky,” he said.
Amazon could also be the “elephant in the room”, McCabe suggested. “Our sense is that Amazon’s share of the physical book market is now growing very slowly, in no small part due to the effectiveness of the Waterstones team and also the enhanced collective quality of the independent bookshop estate: the weaker shops have closed or been bought up and improved. The opportunity for enhanced profits and a better multiple may stem from this simple thesis regarding Amazon.
“So the best-case scenario is that Elliott focuses on leaving management alone, sustaining or growing investment funds for management, and concentrating on financial engineering without burdening the business with more debt... The worst case scenario is that profits become squeezed and the relationship sours. There would be very real consequences for publishers and readers if this were to happen.”
Publishers, authors and agents have welcomed Waterstones’ change of ownership and expressed relief at the news James Daunt is staying on to lead the company.
Others worried Elliott would want to see a turnaround “pretty quickly”.
“I hope that will come in the form of expansionist, creative growth plans rather than the diminution of assets and leases,” said Curtis brown joint chief executive Jonny Geller.