Practical Criticism

Hedge Fund Activist Walks into a Bookstore

Elliott makes a bet on bricks-and-mortar retailers.


HMV via Bloomberg News

Elliott Advisors, best known for taking small positions in corporate giants from Akzo Nobel to Telecom Italia, has taken control of Waterstones, a small British bookseller.

It isn’t an attempt by billionaire investor Paul Singer at practical criticism, but a private equity-style bet on the recovery of Britain's bricks-and-mortar retailers.

The deal has been driven by Paul Best, who joined Elliott last year to lead its private equity efforts in Europe. He came from Warburg Pincus, whose investments in the consumer business include Poundland, clothing specialist Reiss as well Premier Foods.

It's a rare piece of good news for the British high street. Waterstones had languished under a succession of owners including WH Smith Plc and HMV Group Plc.

Under Russian investor Alexander Mamut and CEO James Daunt, who founded the upscale Daunt Books, Waterstones has stabilized and is showing signs of growth. Operating profit before one-time items jumped 29 percent to 27 million pounds in the year through April 2017 on sales of 404 million pounds.

Plenty To Choose From

With retailers collapsing and shedding stores, Waterstones will have its pick of sites

Source: Company reports, Bloomberg

Now the bookseller is looking to expand, under the continued stewardship of Daunt. One of the constraints had been finding enough suitable sites -- but the recent collapses of retailers from Bargain Booze to electronics chain Maplin, together with downsizing at New Look and Mothercare Plc, mean there's now a surfeit of empty shopfronts.

Expanding the estate, or even taking it overseas, where Waterstones' presence is limited, are routes to growth straight out of the private equity playbook.

Elliott will, in due course, look to sell its investment. That could mean an initial public offering or a trade sale, perhaps to Amazon, which has opened physical bookshops, or even a supermarket as grocers look to fill excess space in their stores.

Getting to that exit won't be easy. Amazon still poses a threat to the basic business of selling books, and while the squeeze on consumers' incomes may be abating, shoppers are likely to remain cautious about spending on discretionary items.

The checkered history of hedge funds' involvement in the high street, together with a still challenging consumer outlook, is a reminder that the next chapter at Waterstones won't be without its unexpected plot twists.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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