WHSmith’s $400m deal is half the incredible story

If the story of Britain’s high street is one of inexorable decline, then the paperback will be on sale at WHSmith. Possibly on a wonky shelf. And probably as part of a multi-buy offer with overpriced mints. But while it is still easy to poke fun at the in-store presentation, and implausible margin, WHSmith’s edition of the story now includes some exciting new chapters. In fact, the latest — about a $400m deal in Las Vegas — makes it sound more like an airport blockbuster. Which is exactly what the company itself hopes to become.

Paying $400m for gift shop group Marshall brings 170 new US outlets — 59 in airports — lifting WHSmith to third place in the $3bn US airport retail market. Those airport outlets will instantly contribute $84m of revenue but more is coming: another 36 stores are due to open between 2020 and 2024, ensuring a double-digit compound annual growth rate. They also add to the 116 InMotion travel shops — 43 in US airports — that the group bought for $198m in 2018, gaining a further £94m of non-UK revenue. So, with 317 WHSmith-branded travel units already open overseas — and another 36 to come — the business is on course to have 675 stores beyond these shores, compared with 586 within them.

To retail analysts, the Marshall deal read particularly well. Peel Hunt liked the price, which is 13.7 times earnings of $31.5m, but falls to 10 times when synergies are included. It sounded a lot like the previous InMotion chapter — that deal was done for 9.9 times earnings. WHSmith can easily afford the cover price, having raised £155m through an equity placing at a premium to its share price, and taken out a £200m loan facility. It will have to close the book on share buybacks for a while, and push net debt to 1.4 times earnings, but this should fall back to its target of 1.25 times — making further buybacks a possibility — within a year.

Some readers noted that 70 per cent of operating profit would then be from travel units, and tried to predict the ending. “How long before WHSmith decides to spin off its high-street business?” asked analysts at GlobalData. Outgoing boss Stephen Clarke hinted at the answer, though, by reporting unchanged high-street profit despite falling sales as a disciplined approach to space management, product mix — and, arguably, decor — eked out a further 70 basis points of gross margin. As the FT’s retail correspondent tweeted, it was the same old — incredible — story: in 10 years, margins have doubled, lifting high-street profit a quarter on sales that nearly halved. While the narrative is all that profit, and the cash generated, it will remain a page turner.

If anything, the mystery in this tale is how WHSmith can buy high-growth travel businesses for 10 times earnings while its own shares trade on 17 times — and it has the declining high street to manage every year. To convince investors that both prices are a bargain, Mr Clarke’s successor, Carl Cowling, will need to write a best-selling sequel.

Unilever: thin gruel

When Unilever chief executive Alan Jope vowed to “step-up competitive top-line performance through innovation and portfolio evolution”, he probably was not referring to Lombard’s personal highlight in his third-quarter trading update: “the launch of wet soups in France”. Wet soup would not appear terribly innovative. Nor much of an evolution of French cuisine. But (chef’s) hats off to his colleagues at Knorr for coming up with the idea. Bravo les gars!

No, Mr Jope’s words were more likely meant to reassure investors to whom he had just served up not so much a wet bisque as a damp squib. Ice cream sales were held back in Europe by poor summer weather. Everyone was having a bad hair day in the US as rival Procter & Gamble upped its shampoo game. Home care sales looked soggy compared with the price growth of last year. In fact, to Barclays analysts, one of the few positives was that sales of salad dressing were not so limp.

That left full-year underlying sales growth forecasts in the lower half of the guided range of 3-5 per cent — and Cazenove analysts “concerned about the growth momentum”. Even though Unilever’s year-to-date growth rate of 3.5 per cent was slightly faster than the wider market, and more driven by volume than price in the last quarter, those analysts were worried about a deceleration in pricing in hair care and beauty products “as these are the historical drivers of Unilever’s top line”.

Its shares soon gave up early gains. Little wonder, then, that Barclays tried to cook up some interest in mergers and acquisitions. It said Mr Jope’s recipe for portfolio evolution was “particularly interesting given that the messaging from the company on M&A seems to be changing . . . it has said that the risk of value destruction on small deals is increasing and it’s considering bigger deals where it sees more value.”

Unfortunately, company insiders said there was no change in M&A messaging — making that interpretation look as questionable a concoction as Knorr French Onion soup. Of the wet variety.


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