- Deal proceeds reduced by £12 million
- High street trading has deteriorated
- Travel division trading in line
WH Smith (SMWH) has completed the sale of its UK High Street division to private equity outfit Modella Capital in a transaction that transforms the company into a pure-play travel retailer with improved global growth prospects, and leaves it well-positioned to ‘drive enhanced shareholder value’ according to management.
So why did shares in the FTSE 250-listed group tumble 5% to £10.72 in early dealings on 30 June?
The catalyst was the news WH Smith has trimmed £12 million from the sale price in order to get the deal over the line after weaker trading at the High Street arm led to a last-minute renegotiation with Modella.
CASH FLOW STRAIN
‘Following the agreement and announcement of the sale, the future of the High Street business under a change of ownership has led to a more cautious outlook amongst stakeholders,’ explained WH Smith.
‘This, combined with a period of softer trading, has resulted in a reduction in the ongoing cash flow of the business. Consequently, Modella has recently sought amendments to the construct of the transaction.’
Under the revised terms of the deal, WH Smith will now receive up to £40 million in gross cash proceeds.
That is well below the £52 million originally agreed and announced to the stock market on 28 March.
WH Smith confirmed it has received a £10 million upfront payment, with a further £20 million in deferred consideration tied to the future cash flows of the High Street business through to August 2026.
An additional £10 million may be realised depending on the timing and recovery of specific tax assets within the High Street operations.
Ahead of the deal with Modella, there was speculation the High Street store chain could fetch as much as £100 million for the company.
Hobbycraft-owner Modella will take on 480 WHSmith stores and 5,000 employees as part of the deal, while the 233-year-old retail chain will rebrand as TG Jones.
TRAVEL ON TRACK
While the High Street arm is profitable and cash-generative, it has become less relevant to the group as a whole over the last decade.
By removing exposure to the UK High Street, the sale will improve WH Smith’s margins and accelerate growth in profit and earnings per share.
Crucially, the sale does not include the WHSmith brand, which will remain exclusively associated with the faster-growing travel retail business.
WH Smith confirmed that as the group enters the peak summer trading period, its Travel divisions ‘continue to trade in line with market expectations’.
The Travel business is well-positioned for growth with passenger numbers forecast to grow in air travel by 2.5 times between 2024 and 2050, driven by both population and economic growth, and investment in airport infrastructure is increasing across the globe creating more opportunities for airport retailing.
MODELLA’S ‘CHEEKY MOVE’
Dan Coatsworth, investment analyst at AJ Bell, commented: ‘WH Smith was previously expecting £52 million from the sale, now it’s getting up to £40 million after Modella demanded a lower price to reflect softer trading conditions and a more cautious outlook.
‘It’s a cheeky move, but WH Smith didn’t have a strong case to fight its corner given there wasn’t a long queue of other parties hoping to buy the assets. WH Smith could have risked the deal falling apart completely if it didn’t accept less.’
Coatsworth added: ‘Ultimately, the money is peanuts to WH Smith and it’s probably happy to wash its hands of the business at any price. Strategically it doesn’t fit with the group’s vision of being a pureplay travel retailer.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
