WH Smith's £155m US deal sees further shift from UK high street

Once upon a time, WH Smith (LSE: SMWH.L - news) was one of the most acquisitive players on the high street.

The UK's largest book, magazine and newspaper retailer spent most of the 1970s and 1980s buying up other businesses, including the stationery retailer Paperchase, the music retailer Our Price, the rival bookselling chain Waterstones and a half-share in Sir Richard Branson's Virgin Megastores.

Sometimes, these acquisitions took it into completely unrelated areas, such as its foray into do-it-yourself, culminating in a joint venture with Boots to create the Do It All chain, famous for its jaunty adverts featuring bequiffed rockers.

The sprees continued into the 1990s, with purchases including the £185m takeover in May 1999 of Hodder Headline, then the UK's third-largest book publisher.

But that latter deal was very much a last hurrah.

WH Smith offloaded its entire publishing business just five years later as its then chief executive, Kate Swann, focused on stripping down the business to its core competence of high street and airport newsagents and bookshops and demerging its news distribution arm into a separate company.

The only purchases made by WH Smith in the 2000s were small 'in-fill' acquisitions such as UNS, an operator of retail outlets and coffee shops in hospitals, for just £19m in 2008 and 22 stores from the failed British Bookshops and Stationers chain in 2011 for a mere £1m.

So Tuesday's acquisition of InMotion, the US digital accessories retailer, is quite a dramatic step by the standards of this venerable old company.

The $198m (£155m) deal represents WH Smith's biggest acquisition for nearly two decades.

It is also very much in keeping with WH Smith's strategy.

InMotion, based in Jacksonville, Florida, operates 114 stores across 43 airports in the US and buying it will double the size of WH Smith's international travel business.

While many people assume that WH Smith, founded in 1792, makes most of its money from its traditional high street stores, it is actually its travel business - taking in outlets at airports, railway stations, hospitals and workplaces - that has been the main growth generator in recent years on the back of the boom in air travel.

The travel business has grown profits in each of the last 10 years and now accounts for two-thirds of group operating profit.

The importance of the travel arm was shown by the trading update accompanying the deal announcement.

During the first eight weeks of WH Smith's financial year, which began on 1 September, total sales in the travel business were up 10% on the same period last year and up 4% on a like-for-like basis (which strips out the impact of store openings and refurbishments).

In the high street arm of the company, by contrast, sales were down 1% and by 2% on a like-for-like business.

However, the big gap in WH Smith's travel business, which has outlets in airports across countries including Brazil, Spain, India, Australia and China, has been the United States.

Accordingly, investors have welcomed the deal: shares of WH Smith, which have doubled during the last five years, were up by 6.5% in mid-morning, taking the company's stock market valuation to £1.9bn.

Jonathan Pritchard and John Stevenson, the retail analysts at broker Peel Hunt, said: "The market historically has been sniffy about UK retailers going to the US, but strategically we think that this is a great deal.

"The US has long been a gap in the WH Smith overseas travel portfolio and this solves that problem in one fell swoop."

Chief (Taiwan OTC: 3345.TWO - news) executive Stephen Clarke, who succeeded Ms Swann five years ago, noted: "InMotion is a highly successful pure play travel retailer in the world's largest travel retail market.

"The acquisition of InMotion is an exciting value creation opportunity for the WH Smith group and marks a major step in our international travel retail growth strategy."

He said that WH Smith was likely to use InMotion to launch its airport format in the US, the world's largest travel retail market for news, books and other convenience products, while it was possible the InMotion format would be rolled out around the world.

WH Smith has in recent years expanded into selling digital accessories such as headphones and adaptors and also has a 'tech only' offering called TechExpress at airports and railway stations.

To highlight the growth potential, Mr Clarke pointed to figures suggesting the number of US air passengers is set to surge from 1.8 billion this year to 2.2 billion by 2024, the vast majority of them international travellers.

WH Smith will, after buying InMotion, be even more highly geared towards serving the travelling public and its UK high street business has become ever more peripheral.

Ms Swann and, latterly, Mr Clarke kept the show on the road at the latter by abandoning certain product lines, most famously CDs and DVDs, in order to focus on higher margin products such as stationery.

That margin-boosting strategy ensured that, for many years, profits at the high street stores carried on rising even as sales were falling.

However, as the high street faces a competitive onslaught from online retailers and headwinds from rising rents, business rates and staffing costs, that trick is becoming harder to pull off.

It would be no surprise if the ultimate destination for WH Smith was to become a business focused entirely on airports, railway stations and other places where customers are 'on the go' - and abandoning the UK high street entirely.