27th Jun 2006 07:02
Smith WH PLC27 June 2006 27 June 2006 WH Smith PLC Separation of WH Smith Retail and News Distribution businesses via a Demerger On 12 April 2006 the Board of WH Smith PLC announced its intention to separatethe WH Smith Retail and News Distribution businesses via a Demerger, resultingin the creation of two separately listed companies. Today, the Board isproviding investors with further information on the proposed Demerger andoutlining the reasons why the Board believes that the Demerger is in the bestinterests of WH Smith PLC and its Shareholders. Key Highlights • Demerger of WH Smith Retail business into a separately listed company, New WH Smith PLC, which will be renamed WH Smith PLC • News Distribution business will be renamed Smiths News PLC • Existing WH Smith Shareholders will receive one share in New WH Smith and one share in Smiths News for each WH Smith share • Kate Swann and Alan Stewart to be Group Chief Executive and Group Finance Director, respectively, of New WH Smith. All other members of the existing WH Smith Board become non-executive directors of New WH Smith • Mark Cashmore and Alan Humphrey to be appointed Chief Executive and Finance Director, respectively, of Smiths News • Brendan Fitzmaurice to be appointed non-executive Chairman, Dennis Millard to be appointed non-executive Deputy Chairman and Anthony Cann to be appointed non-executive director of Smiths News. WH Smith is seeking, as soon as is practicable, a further non-executive director to join the board of Smiths News • New WH Smith and Smiths News intend to recommend dividends at the time of their preliminary results announcements for the period ended 31 August 2006 of 6.2p and 4.0p, respectively • There will be no change to employees' pension benefits as a result of the proposed Demerger. Upon Demerger, the WH Smith Pension Trust will be divided into two sections with each successor entity bearing its own share of the existing WH Smith Group pension obligation • As part of the ongoing programme for reducing the pension deficit, WH Smith has agreed with the Trustees of the WH Smith Pension Trust that a £50m payment be made into the WH Smith Pension Trust to be funded from £70m of new borrowings of Smiths News • The Management Investment Plan will continue for existing participants and Executive Directors of WH Smith (Kate Swann and Alan Stewart) are required to retain Investment Shares in both New WH Smith and Smiths News. Separate EPS targets will be set for each business based on the original plan. The TSR of the combined companies will be added together so that the aggregate is comparable with the original targets • The proposed Demerger is subject to Shareholder approval. Shareholder documentation is expected to be posted to Shareholders on or around 7 July 2006 with Shareholder meetings anticipated in early August and the Demerger expected to become effective on 31 August 2006 Commenting on the announcement, Kate Swann, Chief Executive of WH Smith, said: "With a strong team in place to run Smiths News and the existing management teamremaining to run Retail as an independent company, both businesses will benefitfrom increased focus on their respective strategies." Mark Cashmore, Chief Executive of Smiths News, said: "The Demerger is an exciting step for Smiths News. The team is looking forwardto working as an independent company focused on building value for shareholdersby providing value-added customer service to both publishers and retailers." Current Trading Since the announcement of its Interim Results on 12 April 2006, WH Smith Group'sbusinesses have continued to trade satisfactorily and market conditions have notchanged. High Street Retail has made further progress in its recovery plan withthe focus on increasing profitability and improving cost control. Travel Retailhas continued to build on its good first half trading results. In a challengingmarket, News Distribution has delivered a solid performance. Overall the Boardcontinues to be cautious about the outlook for consumer spending. Nevertheless,current trading is in line with management expectations and the Board remainsconfident in the outcome for the full year. Background To And Benefits Of The Demerger Since 2003 WH Smith has undertaken a restructuring of the WH Smith Group byselling non-core assets including its Asia Pacific retail operations, the UShotels and airports businesses and Hodder Headline Limited. As a result, WHSmith now has two businesses: WH Smith Retail and News Distribution. Althoughthese businesses have operated within the WH Smith Group for a long time, thereare limited operational synergies and the Board believes that there is nocontinuing strategic logic for them to remain part of the same group. Accordingly, the Board believes that it is now appropriate to separate the twodistinct businesses into independently listed entities. This will allow bothbusinesses to benefit from greater management focus on their respectivestrategies as independent businesses. As a separate company, the News Distribution business will be more responsive topublisher needs and be capable of investing further in its services topublishers. Without the link to the WH Smith Retail business, the NewsDistribution business will also be able to work more effectively with otherretailers who have previously viewed the News Distribution business as beingpart of a competitor's group. Furthermore, the Board believes that the NewsDistribution business will be better placed to maximise its technologicalinvestments, win new business and develop new revenue streams. The OFT is currently reviewing the system of exclusive territory contractsawarded by the publishers/distributors to wholesalers, following changes tocompetition law from which newspaper and magazine wholesalers were previouslyexempt. The OFT issued a draft opinion for consultation on 19 May 2005.Following wide-ranging responses in the consultation process and an internalreview requested by senior management of the OFT, the OFT announced on 13 March2006 that it would issue a new draft opinion on the compatibility of newspaperand magazine distribution agreements with UK competition laws. The new draftopinion was issued on 31 May 2006 and provides a framework for self-assessmentby wholesalers and publishers. The newspaper and magazine distribution industry is becoming increasinglycustomer focused and, irrespective of the terms of the OFT's final opinion, thistrend is likely to continue. News Distribution remains focused on continuing todeliver excellent customer service. News Distribution is the UK's leadingwholesaler of newspapers and magazines. It benefits from economies of scale andhas invested heavily in IT systems to enable it to provide high levels ofcustomer service both to publishers and retailers. Consequently, the Boardbelieves the business is well placed to adapt to any changes in the market andit will be playing an active part in the upcoming consultation process with theOFT. As an independent listed UK retailer, the Board believes the WH Smith Retailbusiness will also benefit from greater focus, enabling the High Street Retailbusiness to continue the delivery of its recovery plan and the Travel Retailbusiness to continue with its growth path. Summary And Effect Of The Proposals The Proposals involve the Demerger of the WH Smith Retail business from theexisting WH Smith Group, creating two new holding companies, Smiths News PLC(which will be the holding company of the News Distribution business) and New WHSmith PLC (which will be the holding company of the WH Smith Retail business).WH Smith Shareholders will receive one Smiths News Share and one New WH SmithShare for each WH Smith Share. Shareholders will hold the same proportion ofshares in Smiths News and New WH Smith after the Demerger as they held in WHSmith before the implementation of the Proposals. Upon the Demerger, New WHSmith PLC will be renamed "WH Smith PLC". The steps required to implement the Proposals include the insertion of a newholding company, Smiths News, between WH Smith and its shareholders via a schemeof arrangement, a reduction of share capital of Smiths News, the Demerger of theWH Smith Retail business by a dividend in specie of WH Smith, the issue toSmiths News's shareholders (the former WH Smith Shareholders) of shares in NewWH Smith and a subsequent reduction of capital of New WH Smith. The aggregatecosts of the Proposals are not expected to exceed £12m. Shareholder approval is needed to implement the Proposals and is being sought attwo Shareholder meetings, a Court Meeting and an Extraordinary General Meeting(EGM). Notices convening these meetings will be set out in the Shareholdercircular, which is to be posted on or around 7 July 2006. The Smiths NewsProspectus and New WH Smith Prospectus, which contain prescribed informationrelating to Smiths News and New WH Smith respectively, will be published atwww.whsmithplc.co.uk on or around 7 July 2006. Boards Of New WH Smith And Smiths News The board of New WH Smith will remain unchanged from that of WH Smith and willcomprise the following members: Robert Walker Non-executive ChairmanKate Swann Group Chief ExecutiveAlan Stewart Group Finance DirectorJohn Barton Non-executive Director, Senior Independent DirectorMike Ellis Non-executive DirectorLuke Mayhew Non-executive DirectorMT Rainey Non-executive Director The board of Smiths News will, with effect from the Demerger, comprise thefollowing members: Brendan Fitzmaurice Non-executive ChairmanDennis Millard Non-executive Deputy Chairman, Senior Independent DirectorMark Cashmore Chief ExecutiveAlan Humphrey Finance DirectorAnthony Cann Non-executive Director WH Smith is seeking, as soon as is practicable, a further non-executive directorto join the board of Smiths News. Dividend Policies The directors of Smiths News and New WH Smith intend to recommend a dividend of4.0p per share and 6.2p per share, respectively, at the time of theirpreliminary results announcements in October 2006. The timetable for thedeclarations and payments of these dividends is expected to be in line with WHSmith's historic practice. The aggregate value of these Smiths News and New WHSmith dividends will equal the final dividend, which the Board currently wouldexpect to recommend in respect of the financial year ending 31 August 2006 ifthe Demerger does not proceed. Taken together with the interim dividend of WHSmith of 5.1p declared on 12 April 2006, the aggregate of these intendeddividends and the interim dividend equates to 15.3p per share. Thereafter, the boards of Smiths News and New WH Smith intend to adoptprogressive dividend policies. New WH Smith's dividend policy will aim todeliver real growth, taking into account the long-term development of thebusiness. The New WH Smith directors intend to target a dividend that would,over time, be broadly covered twice by earnings. Smiths News's dividend policywill reflect the highly cash generative nature of the business and the proposedSmiths News directors intend, over time, to target a dividend that would bebroadly covered twice by earnings. Going forward it is intended that the Smiths News and New WH Smith interimdividends will be paid in June and final dividends will be paid in February, inthe approximate proportions of one-third and two-thirds, respectively, of thetotal annual dividend. Capital Structure And Effective Tax Rate As part of the Demerger, approximately £70m of new borrowings will be drawn downby Smiths News under new facilities (outlined below), principally to fund the£50m payment to be made following the Demerger to the WH Smith Pension Trust(Pension Trust) by the News Distribution business and the WH Smith Retailbusiness. Smiths News has entered into an agreement that will provide a £50mterm loan facility and a £50m revolving credit facility. Additionally, New WHSmith has entered into a £90m credit facility agreement that will be availablefor working capital and general corporate purposes. These facilities essentiallyreplace WH Smith's existing credit facility agreement. No new equity capital isbeing raised by either New WH Smith or Smiths News. In addition, the existing WHSmith B and C shares and 5.125% loan stock will be repaid and redeemed,respectively. Since the 2005 financial year and following its withdrawal from internationalactivities through the disposal of a number of businesses, WH Smith has had aneffective tax rate below the UK standard tax rate. Following the Demerger, it isexpected that New WH Smith and Smiths News will continue to have an effectivetax rate below the UK standard tax rate over the medium term. The exact tax rateachieved will depend on the underlying profitability of each business and theclosing off of outstanding tax assessments. Over time, the tax rate in New WHSmith and Smiths News is expected to revert to the UK standard tax rate. In thecurrent financial year, an effective tax rate of approximately 20% is expected. Pensions WH Smith currently operates two pension schemes, the defined benefit scheme, WHSmith Pension Trust, and the defined contribution scheme, WH SmithPensionbuilder. No members have been admitted to the Pension Trust since 1 April1996. On an IAS 19 basis, at 31 March 2006, the gross defined benefit pension deficitwas £104m (£73m net of deferred taxation) for the Pension Trust, up from £87m at28 February 2006 due to market conditions and revised assumptions. On an ongoingbasis, the gross defined benefit pension deficit was £159m (£111m net ofdeferred taxation) for the Pension Trust. The ongoing deficit is greater thanthe IAS 19 deficit due to different assumptions and calculation methodologies. As a result of the Demerger, it is intended to divide the Pension Trust into twosections: one for the News Distribution business and one for the WH Smith Retailbusiness. This will involve segregating the assets and liabilities of thePension Trust, by way of a "sectionalisation" to reflect the membership of thetwo businesses. These proportions will be approximately 35:65 for the NewsDistribution business and the WH Smith Retail business, respectively. Assetsapportioned to one section of the Pension Trust will not be able to be used forthe purposes of the other section. There will be no cross-subsidy orcross-guarantee between the sections of the Pension Trust, so that an employerin the News Distribution business section will not be responsible for theliabilities of an employer in the WH Smith Retail business section and viceversa. However, for administrative and investment purposes the Pension Trustwill operate generally on a unified basis except that the principal employerwill be replaced with a sponsor for each of the sections of the Pension Trust.The Pensionbuilder scheme will also be divided into two sections. As part of the ongoing programme for reducing the pension deficit, the WH SmithGroup will make a further one-off payment to the Pension Trust of £50m. In theperiod from 31 August 2004 to 31 March 2006 WH Smith has reduced the net pensiondeficit by £71m as calculated under UK GAAP (from £144m to £73m). The one-offpayment would have effectively reduced the IAS 19 pension deficit to £38m net ofrelated deferred tax as at 31 March 2006. Upon sectionalisation and after takingaccount of the £50m one-off payment: • The News Distribution business's net pension deficit as at 31 March 2006 would have been £14m and £27m on a IAS 19 basis and an ongoing basis, respectively, net of related deferred tax; and • The WH Smith Retail business's net pension deficit as at 31 March 2006 would have been £24m and £49m on an IAS 19 basis and an ongoing basis, respectively, net of related deferred tax. The combined WH Smith Retail business and News Distribution business have alsoagreed with the Pension Trust Trustees to make ongoing pension deficit paymentsof £15m in total each year, commencing 1 September 2006, over the next fiveyears to reduce the Pension Trust deficit. The £15m annual payment will bedivided between the News Distribution business and WH Smith Retail business inthe estimated proportions 35:65, amounting to approximately £5m and £10m,respectively. The aggregate future annual pension deficit payments of the twobusinesses will be less than the current agreed annual pension deficit paymentsof WH Smith, reflecting the reduced pension deficit following the one-offcontribution. WH Smith has applied for and been granted clearance by the Pensions Regulator inrespect of the above pension arrangements. WH Smith Share Plans The Remuneration Committee of the WH Smith Group Board has reviewed all WH SmithShare Plans. Under the L-TIP, which covers circa 20 executives, existing awards will bereplaced with awards of options over shares in the post-Demerger employingcompany with the same intrinsic value. Other terms and conditions remainunchanged. Unapproved options will be replaced with options over the post-Demergeremploying company with the same intrinsic value. Other terms and conditionsremain unchanged. Approved options and the Sharesave scheme options become exercisable just priorto Demerger as HMRC will not allow for the approved options or Sharesave schemeoptions to be adjusted appropriately. Under the rules of the Management Investment Plan (MIP) consent is required by75% of participants in the MIP as measured by value to amend the rules of thescheme in order that the Demerger is not considered an event that would triggerthe right to exercise Matching Awards. The Company has received theparticipants' consent to amend the rules of the scheme. Following the Demerger,participation in the MIP will continue for existing participants in both New WHSmith and Smiths News. For every current Investment Share, participants willreceive one share in WH Smith Retail and one share in Smiths News. Kate Swannand Alan Stewart, as Executive Directors, will be required to continue to holdboth the New WH Smith Shares and Smiths News Shares they receive as a result oftheir holding of Investment Shares in order for their Matching Awards to vest. All other participants will be required either to continue to hold shares ofboth companies or sell the shares of the company which does not employ them, inwhich case they will be required to purchase the equivalent value of shares intheir post demerger employing company net of tax and dealing costs, by 30November 2006. Matching Awards will be paid in both New WH Smith Shares andSmiths News Shares, to the value earned under the MIP regardless of the decisionmade under personal investment. For the TSR performance condition, the market capitalisation at the end of theperformance period of the two new companies plus reinvested dividends paid overthe whole of the three-year period, will be added together to determine thepercentage of Matching Awards vesting. The performance targets will continue tobe measured relative to the General Retailers Sector of the FTSE All ShareIndex. Separate EPS targets will be set for each business. The allocation of theoriginal WH Smith EPS target between the two businesses is in proportion to thecontribution that each business was originally planned to contribute to WH SmithEPS at the time that the MIP was established. The targets are not being adjustedfor the on-going PLC costs relating to the Demerger (including the Smiths NewsCredit Facility) so that the underlying profits required to achieve the targetsare effectively being increased. Consequently, it is estimated that, based on anassumed level of RPI for the performance period of 3% per annum, the thresholdEPS for New WH Smith will be 23.0p and the maximum EPS will be 29.0p. Similarly,it is estimated that the threshold EPS for Smiths News will be 11.4p and maximumEPS will be 14.5p. In aggregate these estimated targets equate to 34.3p forthreshold performance and 43.5p for maximum performance, equal to the currenttargets with the same assumptions for inflation. Pursuant to resolutions to be proposed at the EGM, the directors of Smiths Newsand New WH Smith will be authorised to introduce the new L-TIP, executive shareoption scheme and employee Sharesave scheme after the Demerger. Indicative Timetable 2006 ------Posting of circular and publication of prospectuses 7 JulyExtraordinary General Meeting 2 AugustScheme becomes effective and Smiths News becomes the ultimate holding 30 Augustcompany of WH SmithSmiths News Shares admitted to the Official List and trading in Smiths 30 AugustNews Shares commences on the London Stock ExchangeNew WH Smith Shares admitted to the Official List and trading in New 1 SeptemberWH Smith Shares commences on the London Stock Exchange Investors should note that on 30 and 31 August 2006, it is expected that SmithsNews PLC will trade as the new holding company for the WH Smith Group and willhold both the WH Smith Retail and the News Distribution businesses prior to theDemerger becoming effective, which is expected on 31 August 2006. Information On New WH Smith And Smiths News Information on New WH Smith and Smiths News is set out in the annex to thisannouncement. ENDS Enquiries: WH Smith PLCMark Boyle Investor Relations +44 (0) 20 7851 8820Louise Evans Media Relations +44 (0) 20 7851 8850 Greenhill Financial Adviser to WH Smith +44 (0) 20 7440 0400James LuptonPeter Bell JPMorgan Cazenove Brokers to WH Smith +44 (0) 20 7588 2828Edmund ByersLuke Bordewich Merrill Lynch Brokers to WH Smith +44 (0) 20 7628 1000Mark AstairePatrick Bowes Brunswick PR Advisers to WH Smith +44 (0) 20 7404 5959Tom BuchananKate Holgate The contents of this announcement have been issued by and are the soleresponsibility of WH Smith PLC. Greenhill & Co. International LLP, which is regulated in the UK by the FinancialServices Authority, is acting for WH Smith as financial adviser and sponsor forSmiths News and New WH Smith as sponsor in connection with the Proposals and forno one else and will not be responsible to any other person for providing theprotections afforded to its clients, or for providing advice in relation to theProposals. This announcement does not comprise a prospectus relating to Smiths News or NewWH Smith. It does not constitute or form part of any offer of securities, orconstitute solicitation of any offer of securities. You should not purchase orsubscribe for securities referred to in this announcement except on the basis ofinformation in the prospectuses to be issued in due course in relation to SmithsNews and New WH Smith (and any supplement or amendment thereto). This announcement does not constitute a recommendation concerning the Proposals,and should not be construed as legal, business, tax or investment advice. Thevalue of shares can go down as well as up. Past performance is not a guide tofuture performance. Shareholders of WH Smith should consult a professionaladviser as to the suitability of the Proposals for the individual concerned. Shares in Smiths News and/or New WH Smith have not been and will not beregistered under the United States Securities Act of 1933 (as amended) and willbe issued in transactions that are exempt from or not subject to theregistration requirements of such Act. In addition, shares in Smiths News and/orNew WH Smith have not been and will not be registered under the securities lawsof any state of the United States, and will be issued in reliance on availableexemptions from such state law registration requirements. This announcement contains certain forward-looking statements. Suchforward-looking statements involve risks and uncertainties that couldsignificantly affect expected results and are based on certain key assumptions.Many factors could cause actual results to differ materially from thoseprojected or implied in any forward-looking statements. Due to suchuncertainties and risks, readers are cautioned not to place undue reliance onsuch forward-looking statements, which speak only as of the date hereof. WHSmith, Smiths News and New WH Smith disclaim any obligation to update anyforward-looking statements contained herein, except where it would be requiredto do so under applicable law. The financial information concerning WH Smith, Smiths News and New WH Smithcontained in this announcement does not amount to statutory accounts within themeaning of section 240 of the Companies Act 1985. Annex Information On The WH Smith Retail Business WH Smith Retail is one of the best-recognised UK retail brands and has anextensive store portfolio spanning 543 high street and 128 travel stores. It ispresent in 85 per cent. of the top 500 UK retailing locations and 95 per cent.of its stores are in prime locations with high customer traffic. On average,just over 1.2 million people visit a High Street Retail store every day andapproximately 125 million travellers pass WH Smith Retail's busiest travel storeat London's Victoria Station each year. WH Smith Retail has market-leading positions in three product categories, withmarket shares of approximately 15 per cent. in books, 18 per cent. in magazinesand 13 per cent. in stationery. It has a reputation as one of the UK's mostpopular stationers, booksellers and newsagents. Its outlets are frequently afirst choice for customers on the high street and it is a trusted convenienceretailer for customers at its travel locations. In the year to 31 August 2005, WH Smith Retail had operating profits beforeexceptional items of £47m on revenues of £1,423m and gross assets of £542m. Information On The Smiths News Business 1. Business overview News is the UK's leading wholesaler of newspapers and magazines by share byvalue, serving approximately 22,000 retailers in England and Wales daily. Newshandles over 59 million copies of newspapers and magazines every week servingretail outlets ranging from small newsagents and convenience stores tosupermarkets and garage forecourts. It receives newspapers and magazines in bulkfrom publishers and distributors and then re-packs and distributes them toretailers in one of the most time sensitive and fast-moving daily logisticsoperations in any supply chain. As products are sold predominantly on a "sale orreturn" basis, News also handles the return of newspapers and magazines unsoldby retailers. News provides a number of other services to publishers/distributors and retailers including copy management, information provision andmerchandising. News currently has an approximate 39 per cent. share by value ofthe magazine wholesaling sector and an approximate 36 per cent, share by valueof the newspaper wholesaling sector in the UK. News is positioned between publishers/distributors and retailers and providesservices to both: •For publishers/distributors, News distributes their titles and manages copy allocation to increase sales and availability and to reduce returns. News also undertakes sales development activities and provides the publishers/distributors with sales data and support to help them achieve growth in sales; and •For retailers, News supplies newspapers and magazines aiming to maximise sales and availability and handles returns. News also offers a number of services to help retailers increase sales and maximise business opportunities, including: sales development activities, marketing support, sales information, range and space advice, shop refitting and merchandising. Publishers of newspapers and distributors of magazines normally enter intolong-term supply contracts (on average around five years) with the wholesalers.These contracts currently provide for exclusivity in pre-determined geographicterritories. The geographic territories are broadly similar for the magazine andnewspaper sectors. The territories of publishers/distributors and wholesalershave evolved to a level where the efficiency of distribution is high, withpublishers/distributors effectively sharing the cost with wholesalers to marketin a way that is difficult for any individual industry participant to matcheconomically. Recent contract awards with publishers/distributors have progressed well andNews has now, in line with the current industry structure, contractedapproximately 81 per cent. of its revenue. The contracts have an average of fouryears remaining on each contract. News operates 45 warehouses throughout England and Wales. News has approximately4,200 employees and uses around 1,400 contractors. The News business operates 24hours a day, 364 days a year. The News business generated operating profit of £33m on revenues of £1,187m inthe financial year ended 31 August 2005 on an unaudited pro forma basis. In thecurrent financial year to date, News continues to deliver a solid tradingperformance through service improvements and tight cost control, recording salesof £587m and generating operating profit of £17m for the 26 weeks ended 28February 2006 on an unaudited pro forma basis, despite slower consumer spendingand rising costs. 2. Market overview 2.1. UK industry background The UK newspaper and magazine industry is a developed and diverse market withhigh numbers of newspapers and magazines produced per capita. Magazines andnewspapers are sold to consumers through approximately 53,700 retail outlets,reaching all parts of the UK. The national newspaper sector in the UK is dominated by five major publishinggroups. The retail sales value of national newspapers sold in the UK in 2005 wasestimated to be £2.27bn and has grown in value at a compound annual growth rateof 2.6 per cent. since 2000. The magazine sector is divided into weekly and monthly titles as well asone-shots (one-off publications which cover particular events, for example thefootball World Cup) and partworks (publications produced as a series to form acollection). The number of consumer magazines published in the UK is currentlyapproximately 3,300 titles. Approximately 42 million consumer magazines aredelivered to retailers every week. The retail sales value of consumer magazinessold in the UK in 2005 reached £2.03bn and has grown in value at a compoundannual growth rate of 3.1 per cent. since 2000. The magazine and newspaper supply chain operates on a sale or return basis.Publishers of newspapers and distributors of magazines generally award long-termsupply contracts (on average around five years) to wholesalers. These contractscurrently provide for exclusivity in pre-determined geographic territories withthe relevant wholesaler being appointed as the exclusive supplier of thatnewspaper publisher or magazine distributor's titles in the territory and beinggranted with absolute territorial protection (see below). The geographicterritories for the magazine and newspaper sectors are broadly similar. Theterritories of publishers/distributors and wholesalers have evolved to a levelwhere the efficiency of distribution is high, with publishers/distributorseffectively sharing with wholesalers the cost to market in a way that isdifficult for any individual industry participant to match economically. 2.1.1. Overview of absolute territorial protection In a newspaper or magazine distribution agreement, News is usually awarded anexclusive territory in which to distribute the particular publisher's/distributor's titles to retailers. The agreement usually grants News absoluteterritorial protection as a result of a ban on both active and passive sales. Aban on active sales means that News is prevented from actively marketing itstitles to retailers located outside of its exclusive territory (i.e. intoanother wholesaler's exclusive territory). A ban on passive sales mean that Newsis also prevented from responding to a request for supplies from retailerslocated outside of its exclusive territory, even if that request is unsolicited,and vice versa for other wholesalers in News's territory. The majority ofnewspaper and magazine distribution agreements appoint wholesalers on thisbasis. The Code of Practice also contains a restriction on passive sales as itrequires that a wholesaler does not accept an application for the supply ofnewspapers from an applicant located outside its operation as defined by therelevant newspaper publisher. In the absence of absolute territorial protection, News would still have theexclusive right to market the publisher's/distributor's titles actively toretailers in a particular territory. It would continue to be prevented fromactively selling to retailers located outside of its exclusive territory.However, News would be able to respond to a "passive" (unsolicited) request forsupplies from a retailer located outside of its exclusive territory (i.e. in acompeting wholesaler's territory) and supply that retailer from its ownexclusive territory. Likewise, other wholesalers would be able to supplyretailers located in News's exclusive territory in response to an unsolicitedrequest for supplies, from their exclusive territories. 2.2. Newspaper publishing The tables below set out the estimated current shares by value of each of thepublishers, wholesalers and retailers in the supply of national newspapers. 2.2.1. National newspaper sector share Publisher Wholesaler RetailerNews International 31% Smiths News 36% Independent 62%Associated News 22% Menzies Distribution 28% NewsagentsMirror Group 16% Dawson News 22% Tesco 6%Telegraph 10% Independents 14% TM Retail 5%Express 9% WH Smith Retail 3%Guardian 5% Sainsbury 3%Independents 3% Morrison 2%Financial Times 2% T&S 1%Sport 1% Star News 1%Other 1% ASDA 1% Other 16% Source: News data, based on contract awards and net sales The five principal newspaper publishers currently account for 88 per cent. ofthe market. The retail channel is more fragmented with small independentnewsagents still accounting for the majority of retailer outlets. News's geographic areas cover some of the more populated areas of the UK,compared to its competitors. 2.2.2. Industry trends and key drivers The national daily UK newspaper sector has experienced declining circulationvolumes since the late 1980s due to changing consumer lifestyles and theincreased availability of news through television and the internet. Newspaperpublishers have increased cover prices with the average newspaper cover priceincreasing by an average 4.3 per cent. per annum since 2000. This has drivencirculation revenue growth of 2.6 per cent. per annum over the same period asthe cover price increases offset circulation declines. The growth in circulationrevenue is an important trend for wholesalers as they are generally remuneratedon the basis of cover prices (70 per cent. of News's newspaper revenues derivefrom contracts based on the value of sales, and 30 per cent. based on volume ofsales). 2.3. Magazine publishing 2.3.1. Structure and size The UK magazine sector has different characteristics from the newspaper sector,as there is a broader range of titles. The magazine publishing market is morefragmented than the newspaper publishing market with a large number of smallpublishers. Many publishers lack the scale to arrange their own distribution,necessitating an intermediary in the magazine value chain, the distributors,which in most cases are owned by the larger magazine publishers. The tables below set out the estimated current shares by value of each of thepublishers, distributors, wholesalers and retailers in the supply of magazines. 2.3.2. Magazine sector shares Publisher Distributor Wholesaler RetailerIPC Media 18% Frontline 29% Smiths News 39% WH Smith 18% RetailEmap 13% Marketforce 27% Menzies 34% Tesco 13% DistributionBauer 7% Comag 21% Dawson News 24% Sainsbury 6%BBC 6% Seymour 7% Independent TM Retail 4%Future 5% Northern & wholesalers 3% Morrisons 4%Northern & Shell 4% ASDA 4%Shell 3% Magazine Somerfield 2% MarketingHaymarket 2% Company (MMC) 2% One Stop 1%National Associated News 2% IndependentMagazine 2% Other 9% newsagents 34%Trader 2% Other 14%MediaDennis 2%Hello 2%Puzzler 2%MediaDC Thomson 2%Conde Nast 1%Other 33% Source: News data, based on contract awards and net sales. The UK magazine industry currently comprises over 3,300 consumer titles with anestimated retail sales value of £2.03bn. As with newspapers, the magazineindustry has two core revenue streams: circulation (retail sales) andadvertising. 2.3.3. Industry Trends and Key Drivers In the early 2000s the magazine sector was characterised by the emergence ofweekly magazine titles, which took market share from monthly magazines. Since2000, UK magazine circulation has grown at a 0.9 per cent. compound annualgrowth rate to 1.37 billion copies. This has been driven by 2.3 per cent. annualgrowth in weeklies over the period while monthlies circulation has declined by1.1 per cent. as the traditional weekly TV listings and popular women's titleshave been complemented by more high profile weekly magazines focusing oncelebrities, popular leisure and fashion interests. Cover prices have grown at acompound annual growth rate of 2.3 per cent. since 2000 with weeklies up 3.2 percent. and monthlies up 2.7 per cent. annually. 3. Competitive strengths The News business is well placed to deliver strong profit growth and cashgeneration through: - UK's leading wholesaler News is the UK's leading newspaper and magazine wholesaler in the sector with anapproximate 39 per cent. share by value of the magazine wholesaling sector andan approximate 36 per cent, share by value of the newspaper wholesaling sectorin the UK. Newspaper and magazine wholesaling is an industry that favours scale and highlocal market share. There are high fixed costs associated with packing anddelivery, therefore, within any given locality, the wholesaler with the mostcontracts awarded by publishers/distributors will have the lowest unit operatingcost. As the UK's largest industry participant in the newspaper and magazinewholesaling distribution industry, News benefits from economies of scale. - Long-term contracts with predictable revenues and gross margins The long-term contracts that News has been awarded by the major newspaperpublishers and magazine distributors give some certainty over future revenuesand gross margins. Following recent contract awards, News has now, in line withthe current industry structure, contracted approximately 81 per cent. of itsrevenues. The contracts have an average of approximately four years remaining oneach contract. News's profits are relatively predictable due to certainty ofdistribution contracts, stable cost structure and the inflation indexation inits carriage service charges to retailers. - Highly cash generative The combination of strong operating cash flow and low capital expenditurerequirements make the News business highly cash generative. - Organisational adaptability and innovation News's organisational adaptability makes it readily able to react to changingneeds in the marketplace. News uses its technology to provide innovativetailored services to individual retailers. An example of this is News'ssales-based replenishment system, which reduces the stock levels that need to beheld by retailers. - Technological investment News currently operates market leading SAP technology, enabling it to providebetter customer service and more efficient business operations than itscompetitors. The News business has spent £5m on sophisticated picking andsorting equipment and £22m to date on implementing SAP technology to improve itsefficiency at handling both physical product and information flows. Thistechnology is regularly improved to ensure that the News business is at theforefront of industry technology. - High level of customer service With the latest technology, News believes that it provides both publishers/distributors and retailers with superior customer service through the provisionof rapid, detailed information on sales, returns and circulation. Independentlyconducted surveys consistently benchmark News as a market leader for customerservice in the industry. The increasing technological sophistication of theseservices ensures that News's relationships with publishers/distributors andretailers are strengthened, thereby enhancing News's competitive position. Management's strategy is to invest further in services that improve theprofitability of newspapers and magazines for key retailers, thereby buildingthe commercial relationship between the major retailers and News, as it becomesfurther involved in retailers' processes and work practices. - Extensive distribution network The distribution network of the News business covers the more highly populatedregions of the UK, providing a highly time-sensitive logistics service for itssuppliers and creating opportunities for share and product range expansion. - Opportunities to develop new revenue streams News is planning to capitalise on revenue growth opportunities such as expandingmerchandising and promotional services to publishers/distributors, providingrevenue-generating on-line information services to distributors, publishers andretailers, and using its warehouse and delivery fleet infrastructure to handleother products for retailers and other customers. News has recently establisheda new business called "The Returns Company" with a view to entering the returnslogistics market. The separation of News and WH Smith Retail is expected toenhance News's ability to develop this new business. News also plans to use itsexisting technology investments to offer IT consultancy through a new operationcalled "Newsworks." - Proven track record of reducing costs Since 2001, News has been successful at reducing operating costs by over £10m.The advanced technology systems of the News business have made a largecontribution towards these improvements and the framework that is now in placeallows for continued cost reduction. - Experienced senior management team The management team at News has over 57 years of combined experience in theindustry and has successfully tendered for publisher/distributor contracts andreduced costs since 2001. Management has developed a strategy to ensure thatNews is best placed in the current market environment, having reduced the numberof warehouses it operates from and increased the efficiency of the business overthe last five years. Management has also led industry initiatives seeking toimprove the industry supply chain through the introduction of Tote and Track,key performance indicators (KPIs), magazine scan, returns processing and SalesBased Replenishment. 4. Strategy As a consequence of the changes in the newspaper and magazine wholesale industryin the late 1980s, News's strategy in the early 1990s focused on developing itsposition within the industry structure of exclusive publisher area contracts.News rationalised its network to improve effectiveness and reduce infrastructurecosts. The primary focus of the News business at this time was to meet the needsof publishers through the retail network. Since 2000, News has focused on investing in the quality of its service topublishers/distributors and retailers in order to gain market share in acompetitive environment and to use the improved data management capability ofits SAP technology. At the same time News embarked on a significant costreduction programme to improve profitability. These initiatives were facilitatedby the automation introduced through the SAP system (£22m investment to date)and the TWI pick and pack system technology, which have enabled a reduction inwaste and improved process effectiveness. The News business has a track record of investment in market leadinginnovations, which enable it to provide a high quality service to bothpublishers/distributors and retailers while enhancing the profitability of Newsby refining the business's cost structure, as well as generating new revenueinitiatives. During 2005, transparent key performance indicators (KPIs) were introduced byNews and disclosed to publishers/distributors and retailers. These allowvisibility of News's logistics performance for publishers/distributors andretailers. The KPIs are agreed in conjunction with publishers, distributors andretailers and have generated a step change in service performance. Performanceis now measured across core logistics areas such as timely delivery, accuracy ofsupplies and returns and product tracking to and from stores. The provision ofthis information is only possible due to the substantial systems investmentundertaken by the News business. Performance improvement has been deliveredthrough the introduction of new measurement tools, a dedicated support team plusclear accountability and responsibilities amongst the staff. The benefits ofintroducing this service are cost savings and reduced wastage, as well asbuilding better customer relations across the supply chain. The market leading, enterprise-wide technology investment made by News gives ita competitive advantage and provides opportunities for new revenue streams suchas additional information services and returns logistics. News is developingservices to generate improved profits for retailers and publishers/distributorsand to build relationships. These include: •Sales Based Replenishment (SBR): a form of "just in time" delivery for retailers that helps them to improve availability and reduce waste by replenishing stock more frequently based on the retailers' sales data. SBR is currently available in all but two of the magazine warehouses of News across the top 300 magazine titles; and •Vendor Managed Inventory (VMI): management of stock and other retailer processes. This is under trial at the moment; and •Electronic Data Interchange (EDI): paperless management of the supply chain, reducing waste for all parties. News is currently in discussion with several industry participants about EDI These services help to increase the attractiveness of News's offering andenhance its relationship with the retailers. News has established a new business called "The Returns Company" to focus on thereturns logistics sector. This is a relatively new sector to the UK, but is setto expand as retailers seek to outsource the processing of returns to specialistthird parties. News has the skills and infrastructure to make rapid progressinto this sector. "The Returns Company's" current focus is on books, though theservice could be used by many types of retailers that need to manage returns.The separation of News and WH Smith Retail is expected to allow News to developthis product with other retailers more rapidly. News has also developed an IT consultancy service named "Newsworks" to providesystems solutions to publishers, distributors and European wholesalers byadapting News' information systems. News is able to use its existing technologyknow-how to provide systems solutions in the newspaper and magazine industry. The new revenue opportunities from "The Returns Company" and "Newsworks" areexpected to contribute less than 10% of profits over the medium term. There arealso opportunities to increase market share in its national newspaper andmagazine business, as well as seeking to increase its current limited presencein the regional newspaper distribution market. 5. Operations News has three sources of revenues: •Publisher/distributor revenues Magazines revenues are calculated as a percentage of the cover price of theproducts sold, based on volume net of returns. Approximately 70 per cent. ofNews's newspaper revenues are based on a percentage of the cover price, with theremainder based on fixed price per copy contracts (generally indexed toinflation), regardless of cover price. •Carriage service charges (CSC) These charges are paid to News by the retailer. News has a standard template ofCSC bands, which specify the charges payable by the retailer. This template isapplied on a national basis and is reviewed annually by the News business. Thetemplate ensures that the charges are indexed for inflation in labour and fuelcosts. •Other activities revenues Paid to News by publishers/distributors and retailers for the additionalproducts and services it provides, such as: vouchers, handling of supplements,information provision, merchandising and returns management. In the 2005 financial year News generated approximately 52% of revenue fromnewspapers, 44% from magazines and 4% from carriage service charges and otheractivities. 6. Capital Expenditure Capital expenditure was approximately £6.3m for the 2005 financial year andconsisted primarily of ongoing maintenance expenditures. The News business doesnot require significant capital expenditure to maintain its warehouses and thecost is usually below the depreciation charge in the annual accounts. Ongoingexpenditure is expected to focus primarily on maintaining and refurbishing theexisting IT systems. The Returns Company and "Newsworks" may require limitedadditional future investment. 7. Pro forma financial information 7.1. Income statement Year ending 31 6 months ended August 28 February 2005 2006 IFRS IFRS£millionContinuing operationsRevenue 1,187 587 ----------- ----------- Operating profit 33 17Finance costs (4) (2) ----------- ----------- Profit/(loss) before tax 29 15 ----------- ----------- 7.2. Balance sheet ----------- As at 28 February 2006 IFRS -----------£ millionNon-current assets 34 -----------Net current liabilities (55) -----------Of which: Cash and cash equivalent --- : Obligations under finance leases (1) : Bank overdrafts and other borrowings (16) ----------- Non-current liabilitiesBank loans and other borrowings (50)Retirement benefit obligation (14)Deferred tax liabilities (4)Long-term provisions (1)Obligations under finance leases (2)Other non-current liabilities --- ----------- ----------- -----------Total net liabilities (92) ----------- ----------- 8. Executive Directors And Senior Management Details of the Executive Directors and Senior Managers of New WH Smith are setout below: Kate Swann (41), Group Chief Executive Alan Stewart (46), Group Finance Director Stephen Clarke (38), Commercial and Marketing Director Tanith Dodge (45), Group Human Resources Director Simon Marinker (47), Stores Director and Managing Director of Travel Retail Neil Monnery (44), Group Strategy Director Robert Moorhead (41), Finance, Property, IT and Direct Director Details of the proposed Executive Directors and Senior Managers of Smiths Newsare set out below: Mark Cashmore (45), Chief Executive Officer Alan Humphrey (52), Finance Director Jonathan Bunting (34), Commercial Director Graeme Underhill (46), Operations Director Glenn Leech (31) Human Resources Director Richard Webb (41), Information Systems Director Mark Charlton (44), Business Planning Director 9. Definitions Code of Practice The industry code of practice for the supply of newspapers to retailers Demerger The proposed demerger of the WH Smith Retail business to create the WH Smith Retail Group and the Smiths News Group Demerger Effective The date on which the Demerger becomes effective, expectedDate to be 31 August 2006 EPS Earnings per share High Street Retail The part of the WH Smith Retail business which operates from primarily high street locations, rather than travel locations, comprising the sale of a wide range of newspapers, magazines, stationery, books and entertainment products New WH Smith New WH Smith PLC (to be renamed WH Smith PLC) New WH Smith Share The ordinary shares in New WH Smith to be allotted and issued pursuant to the Demerger News Distribution The business carried on by the WH Smith Group prior to thebusiness or the Demerger, of wholesaling and distributing newspapers andNews business or magazines to retailers and supplying other services toNews publishers and retailers OFT The Office of Fair Trading Proposals Collectively the proposed Scheme and Demerger and the subsequent New WH Smith Reduction of Capital Scheme The proposed scheme of arrangement Shareholder A registered holder of WH Smith Shares including any person entitled by transmission Smiths News Smiths News PLC Smiths News Credit The £50m revolving credit facility and £50m term loanFacility entered into by Smiths News Smiths News Group Smiths News and those entities which will be its subsidiaries and subsidiary undertakings as from the Demerger Effective Date and where the context requires, its associated undertakings, which will own and operate the News Distribution business following the Demerger Smiths News Share The ordinary shares in Smiths News to be allotted and issued pursuant to the Scheme Travel Retail The part of the WH Smith Retail business comprising the sale of a tailored range of newspapers, magazines, books and confectionery products from outlets primarily based in airports and railway stations WH Smith WH Smith PLC WH Smith Board or The directors of WH Smith as at the date of thisthe Board announcement WH Smith Group Before the Demerger, WH Smith and its subsidiaries and subsidiary undertakings and, where the context requires, its associated undertakings WH Smith Retail The business carried on by WH Smith Group prior to the Demerger of retailing through High Street Retail and Travel Retail WH Smith Retail The entities which carry on the WH Smith Retail businessGroup WH Smith Share The ordinary shares of 2 13/81p each in the capital of WH Smith WH Smith Holders of WH Smith SharesShareholders This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Wh Smith