WH Smith PLC. (Registered in England No )

Transcription

1 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek immediately your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other financial adviser under the Financial Services and Markets Act If you have sold or transferred all of your Existing Ordinary Shares or your Preference Shares, please send this document, together with the accompanying Form(s) of Proxy, as soon as possible to the purchaser or transferee of those shares or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. Greenhill, Cazenove and Hoare Govett, each of whom are regulated in the United Kingdom for the conduct of investment business by the Financial Services Authority are acting for WHSmith and no-one else in connection with the Disposal and the Return of Cash and will not be responsible to any person other than WHSmith for providing the protections afforded to their customers or for providing advice in relation to the Disposal and the Return of Cash or the matters contemplated in this document. Application has been made to the UKLA and will be made to the London Stock Exchange respectively for the C Shares and the New Ordinary Shares resulting from the proposed Capital Reorganisation to be admitted to the Official List and to trading on the market for listed securities of the London Stock Exchange in place of the Existing Ordinary Shares. It is expected that dealings in the Existing Ordinary Shares will continue until the close of business on 24 September 2004 and that Listing of the C Shares and the New Ordinary Shares will become effective and dealings in them will commence at 8.00 a.m. on 27 September The New Ordinary Shares and the C Shares have not been marketed and are not available to the public, in whole or in part, in connection with the application for the Listing of such shares c 15.4e 14.01e 15.4e 14.01(h)(i) 14.01(h)(vii) 6.B.13 6.B.19 6.B.01 6.B.02 WH Smith PLC (Registered in England No ) Disposal of Hodder Headline Limited Return of Cash to Shareholders Management Investment Plan Notice of Extraordinary General Meeting and Notice of Class Meeting of Preference Shareholders This document should be read as a whole. Your attention is drawn to the letter from the Chairman of WHSmith which is set out on pages 5 to 12 of this document and which recommends that you vote in favour of the Resolutions to be proposed at the Extraordinary General Meeting and the Class Meeting referred to below. A notice of the Extraordinary General Meeting of WHSmith, to be held at Cazenove, 20 Moorgate, London EC2R 6DA at p.m. on 23 September 2004 is set out at the end of this document. A Form of Proxy for use at the EGM is enclosed with this document. To be valid, a Form of Proxy must be received by post at Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6RN not later than p.m. on 21 September If you hold shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Lloyds TSB Registrars (CREST participant ID 7RA01) so that it is received by no later than p.m. on 21 September The return of a completed Form of Proxy or CREST Proxy Instruction will not prevent you from attending the Extraordinary General Meeting and voting in person if you wish to do so. A notice of the Class Meeting of Preference Shareholders to be held at Cazenove, 20 Moorgate, London EC2R 6DA at p.m. on 23 September 2004 (or as soon thereafter as the Extraordinary General Meeting convened for p.m. on the same day and at the same place shall have been completed or adjourned), is set out at the end of this document. A Form of Proxy for use by Preference Shareholders in connection with the Class Meeting is enclosed. To be valid, a Form of Proxy must be received by post at Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6RN not later than p.m. on 21 September None of the Existing Ordinary Shares, the C Shares or the New Ordinary Shares have been or will be registered under the Securities Act or the state securities laws of the United States and may not be offered or sold in the United States unless pursuant to a transaction that has been registered under the Securities Act and the relevant state securities laws or is not subject to the registration requirements of the Securities Act or such laws, either due to an exemption therefrom or otherwise. If you have any queries in relation to the Form(s) of Proxy, you may call the Shareholder helpline on (or from outside the UK) between 8.30 a.m. and 5.30 p.m. on any Business Day up to and including 23 September The Shareholder helpline will not provide advice on the merits of the Proposals or give any financial advice. Your attention is drawn to paragraph 8 of Part II of this document which sets out the risk factors associated with the C Shares to be issued under the Proposals (b)

2 This document contains certain forward-looking statements. These statements are naturally subject to uncertainty and changes in circumstance. Actual results may vary materially from expectations contained herein. The forward-looking statements include statements about the Continuing Group s prospects set out in Part I of this document, the Continuing Group s working capital set out in paragraph 9 of Part X of this document and the plans for the Continuing Group set out in Part IX of this document. Factors that would cause actual results to differ materially from those described herein include: WHSmith Shareholders not approving the Disposal; the inability to implement the Continuing Group s plans described in Part IX of this document (including any cost efficiency programmes); the economic environment of the industries in which WHSmith operates; and the general economic environment. Subject to the rules and regulations of the UK Listing Authority and the London Stock Exchange, WHSmith undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The Repurchase Offer is not being made in the United States. 2

3 TABLE OF CONTENTS Page Expected Timetable of Events 4 PART I: Letter from the Chairman of WH Smith PLC 5 PART II: Details of the Return of Cash 13 PART III: Taxation in relation to the Return of Cash 20 PART IV: Rights and restrictions attached to the C Shares 27 PART V: Summary of the key terms of the Share Sale Agreement 32 PART VI: Financial information on Hodder Headline Group 34 PART VII: Pro forma statement of Net Assets 36 PART VIII: Management Investment Plan 40 PART IX: Plans for the Continuing Group 44 PART X: Additional information 48 Definitions 55 NOTICE OF EXTRAORDINARY GENERAL MEETING 59 NOTICE OF CLASS MEETING 64 3

4 EXPECTED TIMETABLE OF PRINCIPAL EVENTS Latest time and date for receipt of Form of Proxy for Extraordinary General Meeting p.m. on 21 September 2004 Latest time and date for receipt of Form of Proxy for Class Meeting p.m. on 21 September 2004 Extraordinary General Meeting p.m. on 23 September 2004 Class Meeting p.m. on 23 September 2004 Latest time for dealings in Existing Ordinary Shares close of business on 24 September 2004 Record Date for the Capital Reorganisation close of business on 24 September 2004 Completion of the Disposal 25 September 2004 New Ordinary Shares and C Shares admitted to the Official List and admitted to trading on the London Stock Exchange s market for listed securities 8.00 a.m. on 27 September (b) 6.B.23(a)(ii) 14.01(h)(i) 6.B.13 6.B18 New Ordinary Shares and C Shares entered into CREST 8.00 a.m. on 27 September 2004 Dealings in the New Ordinary Shares and C Shares commence 27 September 2004 Despatch of Election Forms and certificates for New Ordinary Shares and C Shares 27 September B.15(g) 6.B.23(a)(v) 14.1(h)(iv) Latest time for receipt of Election Forms in relation to the C Share Alternatives p.m. on 26 October 2004 Brokers to make Repurchase Offer by means of an announcement on a Regulatory Information Service, and C Shares of Shareholders who accept the Repurchase Offer repurchased 27 October 2004 Initial C Share Dividend declared and C Shares in respect of which the Initial C Share Dividend is payable convert into Deferred Shares 27 October 2004 Despatch of cheques in respect of C Shares purchased under the Repurchase Offer and the Initial C Share Dividend as appropriate 29 October 2004 Notes: (1) References to time in this document are to London time. (2) If any of the above times or dates should change, the revised times and/or dates will be notified to Shareholders by an announcement on a Regulatory Information Service. (3) All events in the above timetable following Completion of the Disposal are conditional upon Completion of the Disposal. All events in the above timetable following Listing are conditional upon Listing. 4

5 PART I: Letter from the Chairman of WH Smith PLC Directors Registered Office: Richard Handover Greenbridge Road John Barton Swindon Walker Boyd Wiltshire Tim Hely Hutchinson SN3 3RX MT Rainey (incorporated and registered in England Andrew Rolfe with registered no ) Kate Swann John Warren 27 August 2004 To Ordinary Shareholders, Preference Shareholders and, for information only, participants in the WHSmith Share Schemes 14.01a 14.01b Disposal of Hodder Headline Return of Cash to Shareholders Management Investment Plan 1. Introduction On 27 July 2004, the Board of WHSmith provided an update on its plans to deliver value to Shareholders, which included plans to dispose of or demerge its publishing business, Hodder Headline, to return the net cash proceeds from any sale to Shareholders and to put in place the Management Investment Plan. 15.4e On 2 August 2004, the Board announced that it had reached agreement to dispose of Hodder Headline to Hachette Livre for 223 million and intended to return 207 million of cash to Shareholders. I am writing to you today to give you more information on the Disposal, the Return of Cash and the Management Investment Plan and to explain why the Board believes that these Proposals are in the best interests of Shareholders as a whole. In summary these Proposals are: the disposal of Hodder Headline to Hachette Livre for 223 million, comprising 210 million in cash and the assumption of the Hodder Headline net pension deficit, estimated at 13 million. Completion is conditional on certain regulatory approvals and approval by Shareholders; the return of 207 million of cash to Shareholders. In order to effect this there will be a Capital Reorganisation under which you will receive 18 New Ordinary Shares and 25 C Shares for every 25 Existing Ordinary Shares in the Company that you own on 24 September Further details on the Return of Cash are set out below; and the Management Investment Plan under which management will invest their own money in New Ordinary Shares and, subject to the achievement of certain performance and other conditions, matching awards will be made as described in Part VIII of this document a 10.31c 6.B.15(b) 5

6 The Company announced on 27 July 2004 that, following the Disposal, it would make a contribution of 120 million to the Pension Trust, which will be financed from the Group s own resources and new banking facilities. Annual contributions to the Pension Trust will be reduced to approximately 21 million in the first year of a new nine year repayment period over which the current deficit of the Pension Trust is intended to be eliminated, and will be subject to annual review thereafter. The Board unanimously recommends that Shareholders vote in favour of the Resolutions which are to be proposed at the EGM and the Class Meeting to approve the Proposals d 15.4e 2. Background to and reasons for the Proposals WHSmith s publishing business operates through the Hodder Headline Group, one of the UK s largest and most diverse book publishers. It has strong positions in both consumer and educational publishing and has operations in the UK, Australia and New Zealand and employs 833 people worldwide. The acquisitions of publishers John Murray (Publishers) Limited and Robert Gibson & Sons Glasgow, Limited during its ownership by WHSmith further strengthened its position in both the consumer and education markets. Hodder Headline has performed strongly under WHSmith ownership and this performance continues in the current financial year. However the Board concluded during 2003 that there was little strategic fit and limited operational benefits between Hodder Headline and the other businesses within the Group. Accordingly, the Board had formed the view that Hodder Headline would be divested at an appropriate time. Following the approach from Jamaica Trading Limited, a company formed by Permira Advisers Limited, regarding a possible offer for the Company, a number of expressions of interest in Hodder Headline were received. On 22 June 2004, the Company announced its intention to sell or demerge Hodder Headline before the end of Following the Disposal and the recent sale of the US and ASPAC retail businesses, the Continuing Group will be significantly simplified and focused on three core businesses: UK High Street Retail; UK Travel Retail; and News Distribution. The details of the plans for UK High Street Retail, UK Travel Retail and for News Distribution were announced on 27 July Part IX contains an extract from the announcement which explains these plans. The return of the net cash proceeds from the Disposal to Shareholders is part of the Board s strategy to deliver value to Shareholders through the improved efficiency of the Company s balance sheet and enhanced earnings per share. The introduction of the Management Investment Plan is intended to demonstrate management s commitment to, and belief in, the plans for the Continuing Group. The Board is also proposing, in conjunction with the above Proposals, to amend the rules of the Sharesave Scheme to remove a limit which is no longer required by institutional shareholders guidelines. Disposal of Hodder Headline The Board announced on 2 August 2004 that it had reached agreement to sell Hodder Headline to Hachette Livre for 223 million, comprising 210 million in cash and the assumption of the Hodder Headline net pension deficit, estimated at 13 million. The consideration is subject to an adjustment, on a pound for pound basis, for working capital and external third party debt at Completion. In the year ended 31 August 2003, Hodder Headline generated sales of 144 million and profit of 18 million (after adjusting for a 1 million pension charge) and, at 31 August 2003, had net assets, adjusted for the net pension deficit, of 256 million. Completion is conditional on certain regulatory approvals and approval by Shareholders e 10.31d Following Completion, Tim Hely Hutchinson will be leaving the Company. The Board would like to thank him and his team at Hodder Headline for the contribution they have made to the Group. The Share Sale Agreement contains warranties and indemnities customary to this type of transaction. In particular, WHSmith has agreed to pay an amount of 2.5 million to a subsidiary of Hachette Livre if the 6

7 Disposal is not approved by Shareholders on or before 27 September 2004 and a further 2.5 million if WHSmith sells or agrees to sell Hodder Headline on a stand alone basis to a third party during the nine month period following the date of the Share Sale Agreement. A summary of the principal terms and conditions of the Share Sale Agreement is set out in Part V of this document. Return of Cash It is the Board s intention that the net cash proceeds from the Disposal will be used to fund the Return of Cash to Shareholders of approximately 207 million (excluding the C Shares to be issued to the WH Smith Employees Share Trust 1999), or 85 pence per Existing Ordinary Share. The Board is proposing to return this cash by means of the Capital Reorganisation and the C Share Alternatives. This method of return allows all Shareholders to be treated equally on a pro rata basis and provides some flexibility of tax treatment by allowing certain Shareholders to choose whether to receive the return as either income or capital. The Return of Cash is described further in paragraphs 3, 4 and 5 of this letter f Management Investment Plan The proposed Management Investment Plan will provide the Executive Directors and selected members of senior management (initially comprising in total approximately 40 people) with the opportunity to demonstrate their commitment to, and belief in, the plans for the Continuing Group by investing their own money to buy New Ordinary Shares. Participants will be granted a matching award over New Ordinary Shares which will be exercisable provided that certain demanding corporate performance conditions are met and their investment is retained over a period of three years. The detailed provisions of the Management Investment Plan, together with a description of the relevant performance conditions, are summarised in Part VIII. Amendment to Sharesave Scheme It is also proposed to amend the rules of the Sharesave Scheme to remove the 5 per cent. of issued share capital limit on the number of shares that may be issued or be issuable under the Sharesave Scheme, together with shares issued or issuable under all other employee share schemes adopted by the Company, within any 5 year period. It is proposed to remove this limit because it is no longer required by institutional shareholders guidelines. 3. Return of Cash Under the Capital Reorganisation which is required in order to effect the Return of Cash, Shareholders will receive: for every 25 Existing Ordinary Shares held on the Record Date 18 New Ordinary Shares for every Existing Ordinary Share held on the Record Date 1 C Share The C Shares will be admitted to the Official List and to trading on the London Stock Exchange s market for listed securities. The C Shares will have a nominal value of 85 pence each and the total nominal value of the C Shares issued will be approximately 207 million (excluding the C Shares to be issued to the WH Smith Employees Share Trust 1999). Based on the closing middle market price of pence per Existing Ordinary Share on 25 August 2004 (the latest practicable date prior to the posting of this document), the proposed Return of Cash equates to approximately 27.9 per cent. of WHSmith s market capitalisation at that date. 6.B.23(a)(i) (c) 6.B.05(a) 6.B.15(b) 6.B.13 6.B.15(d)(i) In order to reflect the Return of Cash, Existing Ordinary Shares will be consolidated so that Shareholders will receive 18 New Ordinary Shares for every 25 Existing Ordinary Shares they own at the close of business on 24 September New Ordinary Shares will be traded on the London Stock Exchange in the same way as Existing Ordinary Shares and will be equivalent to the Existing Ordinary Shares in all material respects, including their dividend, voting and other rights. The intention is that, subject to normal market movements, the share price of one New Ordinary Share immediately after Listing should be approximately equal to the share price of one Existing Ordinary Share immediately beforehand. The effect of this consolidation will be to reduce the number of issued ordinary shares to reflect the return of 85 pence per share to Shareholders, but Shareholders will own the same proportion of WHSmith as they did previously, subject to fractional entitlements. 7

8 It is expected that share certificates in respect of the New Ordinary Shares and C Shares will be despatched to Shareholders on 27 September Shareholders with CREST accounts will have their New Ordinary Shares and C Shares credited on the same day. All Shareholders will also be sent an Election Form on 27 September 2004 under which they will have the following alternatives: Alternative 1: Repurchase Offer If you choose this alternative in respect of some or all of your C Shares, the Brokers, acting as principals, pursuant to the Repurchase Offer to be made on 27 October 2004, will buy those C Shares for 85 pence per C Share, free of all dealing expenses and commissions. It is expected that a cheque for the proceeds will be sent to you by 29 October The Brokers will have the right to sell C Shares which are repurchased under the Repurchase Offer to the Company. If sold, they will be cancelled and will not be reissued. The Repurchase Offer is not being made in the United States and this alternative will not be available to Shareholders in the United States. Alternative 2: Initial C Share Dividend If you choose this alternative you will receive a single dividend of 85 pence for each C Share that you hold, following which all of your C Shares will automatically be converted into Deferred Shares. No partial election for the Initial C Share Dividend is available. It is expected that a cheque for your Initial C Share Dividend will be sent to you by 29 October Your Deferred Shares will not be listed, will have extremely limited economic rights, no voting rights, negligible value and will be capable of being acquired for nil consideration. No share certificates will be issued in respect of any of the Deferred Shares and it is expected that they will be acquired for an aggregate price not exceeding 1 pence and cancelled shortly after the Initial C Share Dividend has been paid. In either case, you must return your signed and completed Election Form so as to be received either by post at Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6RN, or by hand only during normal business hours at Lloyds TSB Registrars, 3rd Floor, Princess House, 1 Suffolk Lane, London EC4R 0AX, as soon as possible after receipt and in any event not later than p.m. on 26 October 2004 or such later date as the Directors may determine. 6.B.07 6.B.05(a) 6.B.14 6.B.15(f) Further details of the procedures for electing for Alternative 1 or Alternative 2 will be contained in the Election Form. In particular, Election Forms will need to be accompanied by the relevant share certificates for your C Shares where held in certificated form. For C Shares held in uncertificated form (that is, in CREST), the Election Form will set out the relevant requirements. If you do not choose either Alternative 1 or Alternative 2 in respect of all your C Shares or, unless the Directors otherwise determine, you do not properly complete and return your Election Form so as to be received as described above, you will continue to hold some or all of your C Shares which will have limited voting rights and whose only dividend right is to receive a dividend set at a rate (on the nominal value thereof) which is the lower of 75 per cent. of LIBOR and 20 per cent. per annum. In addition, if you are a Shareholder in the United States and you choose Alternative 1, you may be deemed by the Company to have chosen Alternative 2. The ongoing rights and restrictions applying to the C Shares are summarised in Parts II and IV of this document. Under such rights and restrictions, the Company will have the right, after 5 April 2005, on behalf of the holders of C Shares, to transfer the C Shares to the Company or any other person for a price of 85 pence per C Share plus any accrued dividends. The Company will also have the right after such date to convert such C Shares into New Ordinary Shares. The number of such New Ordinary Shares which would be received by a holder of C Shares would be the number of C Shares then held by the Shareholder, multiplied by 85 pence and divided by the then market price of the New Ordinary Shares. You should note that there is no guarantee that the Company will subsequently exercise either of such rights. In addition, there can be no assurance that an active market for C Shares will develop or, if developed, be sustained. 8

9 Subject to the satisfaction of the conditions set out in paragraph 1 of Part II, whilst the Board believes that the Return of Cash will be implemented, Shareholders should be aware that, if circumstances change such that the Return of Cash cannot be made or, in the opinion of the Board, the Return of Cash is no longer in the interests of Shareholders and the Company, the Board will not implement the Return of Cash. In that event, the C Shares may not be issued and Election Forms may not be despatched, or elections made pursuant to them may be of no effect, or the Repurchase Offer and the Initial C Share Dividend may not be made. If you need assistance in completing or have any queries in relation to the Election Form you may telephone the Shareholder helpline on (or from outside the UK) between 8.30 a.m. and 5.30 p.m. on any Business Day up to and including 26 October The Shareholder helpline will not provide advice on the merits of the Proposals or give any financial advice. For further information about the Return of Cash, please see Part II (Details of the Return of Cash). Amendments to the Articles of Association A number of changes to the Articles of Association are required in order to implement the Return of Cash. The changes relating to the Capital Reorganisation are described in Part IV of this document. An amendment to the limit on the Company s borrowing powers contained in the Articles of Association is also proposed in connection with the Return of Cash. The current limit in the Articles of Association is calculated by reference to the Group s consolidated share capital and reserves which will be substantially reduced as a result of the Return of Cash. The proposed amendment to the borrowing limit contained in the Articles of Association would allow the Board to borrow money on behalf of the Company up to a maximum of 300 million, such limit only to be exceeded following the passing of an ordinary resolution of the Company. The calculation of borrowings will exclude, among other things, any deficit under the Pension Trust and liabilities under finance leases. The amended borrowing limit will be subject to regular review by the Board. 4. Taxation A guide to the general tax position of Shareholders resident in the United Kingdom or in the United States at the date of this document is set out in Part III of this document. You are strongly advised to read Part III before completing and returning your Election Form. Shareholders who are in any doubt as to their tax position or who are subject to tax in a jurisdiction other than the United Kingdom or United States should consult their professional adviser. 5. Overseas Shareholders The attention of those Shareholders who are not resident in the United Kingdom or who are citizens, residents or nationals of other countries is drawn to the information set out in paragraph 4 of Part II of this document. 6. Pension Trust Following discussions initiated by the Board, the Board has agreed with the Trustees of the Pension Trust the terms of revised funding arrangements once Hodder Headline is sold. Following the Disposal, the Company will make a contribution of 120 million to the Pension Trust, which will be funded from its own resources and funds from the new borrowing facilities described below. Subsequent annual cash contributions to the Pension Trust will be reduced to approximately 21 million in the first year of a new nine year repayment period over which the current deficit of the Pension Trust is intended to be eliminated, and will be subject to annual review thereafter. This compares to the 42 million cash contribution to the Pension Trust in this financial year as part of the previous twelve-year repayment arrangements agreed in the autumn of The Trustees have agreed not to seek to vary this arrangement prior to 31 August 2005 provided that the Group does not provide security over any part of its assets to a third party or, other than currently envisaged, assume material additional borrowings or debt or dispose of material assets. 9

10 7. New borrowing facilities Taking into account the financial impact of the Proposals, the Company has entered into new committed borrowing facilities comprising a 120 million unsecured term loan and a renegotiated 150 million working capital facility. The Company expects to drawdown approximately 90 million of the unsecured term loan to finance part of the 120 million payment to the Pension Trust. Further details of the terms of the new banking facilities are contained in paragraph 10(a)(ii) of Part X of this document. With the anticipated recovery in the profitability of the UK High Street Retail business, the reduction of ongoing contributions to the Pension Trust, the lower on-going dividend payments following the reduction in dividend in February 2004, tighter control of working capital and the elimination of recent one-off exceptional cash charges, the Board anticipates that the Continuing Group will be strongly cash generative in future years, enabling a repayment of the new borrowings in the medium term. In addition, the plans for the recovery of UK High Street Retail described in Part IX do not require material additional capital expenditure. 8. Continuing Group prospects It is anticipated that the Continuing Group will perform in line with expectations for the financial year ending 31 August The combination of the strong performance of the News Distribution and UK Travel Retail businesses together with the anticipated recovery in the profitability of the UK High Street Retail business gives the Board confidence in the ability of the Continuing Group to make progress from its current position into the future c(ii) 6.G.1(b) 9. Extraordinary General Meeting At the end of this document is a Notice of the Extraordinary General Meeting to be held at p.m. on 23 September At the Extraordinary General Meeting, Shareholders will be asked to consider, and if thought fit, pass the Resolutions to: (1) approve the Disposal; (2) authorise the Return of Cash (including related amendments to the Articles of Association); (3) amend the Company s Articles of Association in relation to the borrowing powers of the Company; (4) approve the Management Investment Plan; and (5) approve the amendment to the Sharesave Scheme. The Disposal is conditional on the passing of Resolution 1, an ordinary resolution, at the Extraordinary General Meeting and on obtaining certain regulatory approvals. Resolution 2 is a special resolution which contains certain authorities necessary to effect the Return of Cash, including the consequential changes to the Company s Articles of Association to reflect the creation of the C Shares. Paragraph 6 of Part II contains an explanation of each part of the special resolution to be put to the meeting. Resolution 3 is a special resolution to approve an amendment of the Articles of Association of the Company in relation to the Company s borrowing limit. The limit on the borrowing powers of the Company is required to be amended in order to effect the Return of Cash since it is currently calculated by reference to the Group s consolidated share capital and reserves, which, as a result of the Return of Cash, will be substantially reduced. In addition, the amendment of such borrowing limit requires the consent of the Preference Shareholders which is to be obtained at the Class Meeting to be held immediately following the conclusion or adjournment of the Extraordinary General Meeting, on the same day and at the same place. Resolution 4 is an ordinary resolution which authorises the adoption of the Management Investment Plan. As set out in further detail in Part VIII of this document, the Management Investment Plan is intended to incentivise Executive Directors and selected members of the senior management team. 10

11 Resolution 5 is an ordinary resolution which authorises the amendment of the Sharesave Scheme to remove the 5 per cent. of issued share capital limit on the number of shares that may be issued or be issuable under the Sharesave Scheme, together with shares issued or issuable under all other employee share schemes adopted by the Company, within a 5 year period. This amendment is being made because this limit is no longer required by institutional shareholders guidelines. 10. Class Meeting of Preference Shareholders At the end of this document, after the Notice of the Extraordinary General Meeting, is a notice of the Class Meeting of the Preference Shareholders to be held at p.m. on 23 September 2004 (or as soon thereafter as the Extraordinary General Meeting shall have been concluded or adjourned). At the Class Meeting, Preference Shareholders will be asked to consider and, if thought fit, to sanction, the amendment to the Articles of Association of the Company relating to borrowing powers as referred to in relation to Resolution 3 above. 11. WHSmith Share Schemes Participants in the WHSmith Share Schemes will not participate in the Return of Cash. No adjustment will be required to the number of shares over which participants in these schemes have options or awards, nor to the amount payable on the exercise of such options or awards. Options or awards over Existing Ordinary Shares will take effect as options or awards over the same number of New Ordinary Shares, which are expected to have approximately the same market value following the Capital Reorganisation as Existing Ordinary Shares. 12. Action to be taken Extraordinary General Meeting Shareholders will find enclosed a Form of Proxy for use in relation to the Extraordinary General Meeting. Whether or not you intend to be present in person at the Extraordinary General Meeting, you are requested to complete, sign and return the Form of Proxy by post to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6RN, as soon as possible, but in any event, so as to arrive by no later than p.m. on 21 September If you hold shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to Lloyds TSB Registrars (CREST participant ID 7RA01) so that it is received by no later than p.m. on 21 September The return of a completed Form of Proxy or CREST Proxy Instruction will not prevent you from attending the Extraordinary General Meeting and voting in person if you wish to do so. 6.B.14 Class Meeting of Preference Shareholders Preference Shareholders will find enclosed a Form of Proxy for use in relation to the Class Meeting. Whether or not you intend to be present in person at the Class Meeting, you are requested to complete, sign and return the Form of Proxy by post to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6RN, as soon as possible, but in any event, so as to arrive by no later than p.m. on 21 September Completion and return of the Form of Proxy will not preclude you from attending the Class Meeting and voting in person should you wish to do so. Return of Cash Election Form It is expected that Shareholders will be sent an Election Form in relation to the C Share Alternatives on 27 September You must return your signed and completed Election Form so as to be received either by post at Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA or by hand only during normal business hours at Lloyds TSB Registrars, 3rd Floor, Princess House, 1 Suffolk Lane, EC4R 0AX, not later than p.m. on 26 October If you do not choose either Alternative 1 or Alternative 2 in respect of all your C Shares or, unless the Directors otherwise determine, you do not properly complete and return your Election Form so as to be received as described above, you will continue to hold some or all of your C Shares which will have limited voting rights and whose only dividend right is to receive a dividend set at a rate (on the nominal 11

12 value thereof) which is the lower of 75 per cent. of LIBOR and 20 per cent. per annum. In addition, if you are a Shareholder in the United States and you choose Alternative 1, you may be deemed by the Company to have chosen Alternative 2. If you have any questions about the procedure to be adopted in completing the Form(s) of Proxy or Election Form, or if you want help in filling in the Form(s) of Proxy or Election Form, please telephone Lloyds TSB Registrars on (or from outside the UK). You should note that this helpline is not able to advise on the merits of the Proposals or to give financial advice. 13. Share certificates New Ordinary Share and C Share certificates will only be issued following Listing. It is therefore important that, if you hold certificates in respect of your Existing Ordinary Shares, you retain them until New Ordinary Share and C Share certificates are despatched, which is expected to be on 27 September When Shareholders receive their share certificates for their holdings of New Ordinary Shares and C Shares, they should destroy their certificates for the Existing Ordinary Shares. 14.1(f) 6.B.23(a)(v) For Shareholders wishing to hold any New Ordinary Shares or C Shares in uncertificated form through the CREST system, the relevant CREST securities accounts are expected to be credited on 27 September Shareholders holding New Ordinary Shares and C Shares in uncertificated form through the CREST system will not receive any share certificates. 14. Further information Your attention is drawn to the further information set out in Parts II to X of this document. You are advised to read the whole document and not merely to rely on the key or summarised information in this letter. 15. Recommendation The Directors consider that the Proposals are in the best interests of WHSmith and its Shareholders as a whole. The Directors have received financial advice from Greenhill in relation to the Disposal and the Return of Cash. In providing its advice, Greenhill has relied on the Board s commercial assessment of the Disposal and the future strategy for the core businesses of the Continuing Group. The Directors unanimously recommend that you vote in favour of the resolutions to be proposed at the Extraordinary General Meeting and at the Class Meeting, as they intend to do at the Extraordinary General Meeting in respect of their own beneficial holdings amounting to an aggregate of 131,795 Existing Ordinary Shares (representing per cent. of WHSmith s issued ordinary share capital). 14.1(d) The Directors are making no recommendation in relation to the C Share Alternatives. The choice between the C Share Alternatives will depend on Shareholders individual circumstances. Yours faithfully, Richard Handover Chairman 12

13 PART II: Details of the Return of Cash 1 Return of Cash The Return of Cash is conditional on: the approval by Shareholders of the resolutions numbered 1, 2 and 3 to be proposed at the EGM; the approval by Preference Shareholders of the resolution to be proposed at the Class Meeting; Completion of the Disposal; and Listing. If any of these conditions are not satisfied, no New Ordinary Shares or C Shares will be created and the Return of Cash will not take effect. In order to return cash to Shareholders it will be necessary to effect the Capital Reorganisation (see paragraph 2 below). The Return of Cash will be made either by way of the Repurchase Offer or the Initial C Share Dividend. Shareholders who do not elect to have their C Shares repurchased or receive the Initial C Share Dividend will retain their C Shares. 2 Capital Reorganisation Bonus issue and subdivision It is proposed to capitalise the sum of approximately 77.7 million standing to the credit of the Company s share premium account which will be applied in paying up in full undesignated shares of 31 pence each in the capital of the Company, to be allocated to Shareholders on the Record Date on the basis of one undesignated share for every Existing Ordinary Share then held. The number of undesignated shares that will be created will reflect the number of Existing Ordinary Shares in existence at that date (currently 250,559,907). Each undesignated share will immediately be consolidated with an Existing Ordinary Share of pence nominal value, following which the resulting share will be split into one share of pence and one C Share of 85 pence. Share capital consolidation All the shares of pence outstanding after the bonus issue and subdivision described above will be subdivided and then consolidated so that Shareholders will receive 18 New Ordinary Shares of pence each for every 25 Existing Ordinary Shares they own at close of business on 24 September New Ordinary Shares will be traded on the London Stock Exchange in the same way as Existing Ordinary Shares. The intention is that, subject to normal market movements, the share price of one New Ordinary Share immediately after Listing should be approximately equal to the share price of one Existing Ordinary Share immediately beforehand. Following the consolidation, Shareholders will hold fewer New Ordinary Shares than the number of Existing Ordinary Shares currently held but will own the same proportion of WHSmith as they did previously, subject to fractional entitlements. Fractional entitlements A fractional entitlement will arise as a result of the consolidation unless a holding of Existing Ordinary Shares is exactly divisible by 25. So, for example, a Shareholder having 30 Existing Ordinary Shares would, after the consolidation, be entitled to 21 New Ordinary Shares and a fractional entitlement to 0.6 New Ordinary Shares. These fractional entitlements will be aggregated and sold in the market on behalf of the relevant Shareholders and the proceeds of the sale will be distributed pro rata to those Shareholders. It is expected that cheques in respect of the proceeds of sale of such fractional entitlements will be despatched by 4 October B.05(a) 6.B.06 6.B (d) 15.04(a) 15.04(b) 6.B.06 6.B.15(b) 6.B.15(d)(iii) 14.11(a) 6.B.16 6.B.05(a) 14.01(h)(vi) 6.B.23(a)(vi) 13

14 Admission to Official List of New Ordinary Shares and to trading on the market for listed securities of the London Stock Exchange Application has been made for the New Ordinary Shares to be admitted to the Official List and application will be made to the London Stock Exchange for them to be admitted to trading on the market for listed securities of the London Stock Exchange with dealings expected to commence on 27 September Subject to the limited rights of any C Shares which are not repurchased or converted into Deferred Shares as described below, the New Ordinary Shares will be equivalent to the Existing Ordinary Shares in all material respects including their dividend, voting and other rights. C Shares The C Shares are expected either to be repurchased under the Repurchase Offer or alternatively converted into Deferred Shares following the payment of the Initial C Share Dividend. Any C Shares not so repurchased or converted will be irredeemable and carry a net non-cumulative dividend set at a rate (on the nominal value thereof) which is the lower of 75 per cent. of LIBOR and 20 per cent. per annum. Dividends on the C Shares (other than the Initial C Share Dividend) will be paid six monthly in arrears on 28 February and 31 August each year (or if such date is not a Business Day the next Business Day), with the first dividend period commencing on the date the Initial C Share Dividend becomes payable and the first dividend being due and payable on 28 February If C Shares are issued but the Return of Cash does not proceed, the first dividend period will commence on the date the Initial C Share Dividend would have become payable, currently expected to be 27 October The C Shares will have limited voting rights and will not provide for any further rights of participation in the profits of WHSmith. 6.B.23(a)(iv) 14.01(h)(iii) 6.B.05(a) 6.B.07 6.B.13 6.B (h) 14.1(h)(i) 14.1(h)(viii) 15.4(a) The restrictions attached to the C Shares also give the Company the right, after 5 April 2005, on behalf of the holders of C Shares, to transfer the C Shares to the Company or any other person for a price of 85 pence per C Share plus accrued dividends. The Company will also have the right after such date to convert such C Shares into New Ordinary Shares. The number of New Ordinary Shares a holder of C Shares would receive from the conversion of its C Shares if the Company were to exercise that right would be the number of C Shares then held by that shareholder multiplied by 85 pence and divided by the market price of the New Ordinary Shares determined at the time of conversion. Further details of the rights and restrictions attaching to the C Shares are set out in Part IV of this document. Application has been made for the C Shares to be admitted to the Official List and will be made to the London Stock Exchange for the C Shares to be admitted to trading on the market for listed securities of the London Stock Exchange with dealings expected to commence on 27 September The Company will apply for the C Shares to be admitted to CREST with effect from Listing. Accordingly, settlement of transactions in the C Shares may take place within the CREST system in respect of general market transactions. 6.B.18 Authorities to allot Following the Capital Reorganisation, the authorities to allot shares and disapply pre-emption rights granted pursuant to sections 80 and 95 of the Act at the Annual General Meeting of the Company held on 29 January 2004 (and which expire at the conclusion of the next Annual General Meeting or on 29 April 2005, whichever is earlier) will apply to the New Ordinary Shares. However, because of the difference in the nominal value between the Existing Ordinary Shares and the New Ordinary Shares, the Directors do not intend to use such authorities to allot a greater number of ordinary shares after the Capital Reorganisation than they would have been able to had the Capital Reorganisation not taken place. 3 Terms of the Repurchase Offer The following terms will apply to the Repurchase Offer: (a) (b) No contract with the Brokers will arise in relation to the sale and purchase of any C Shares, or under which the Brokers may (subject to conditions or otherwise) become entitled or obliged to purchase any C Shares, until the Brokers make the Repurchase Offer, which is expected to be by way of an announcement through a Regulatory Information Service on 27 October The Election Form and all contracts resulting therefrom will be governed by and construed in accordance with English law. Execution by or on behalf of a Shareholder of an Election Form 14

15 (c) (d) (e) (f) (g) (h) (i) constitutes their submission, in relation to all matters arising out of or in connection with such form and the exercise of the powers of the agent elected thereunder, to the jurisdiction of the English courts. Upon execution of the Election Form the Shareholder represents and warrants that he has full power and authority to tender, sell, assign and transfer the C Shares to which the Repurchase Offer and the Election Form relate and that when such C Shares are accepted for purchase by the Brokers, the Brokers will acquire such C Shares free and clear from all liens, charges, restrictions, claims, equitable interests and encumbrances. In addition, by execution of the Election Form the Shareholder (i) agrees that he or she will do all other things and execute any additional documents which may be necessary or, in the opinion of the Brokers, desirable to effect the purchase of the C Shares by the Brokers and/or to perfect any of the authorities expressed to be given under the Election Form and (ii) acknowledges that the Brokers shall not have any liability whatsoever to such Shareholder in respect of acts done or omitted to be done by them on behalf of such Shareholder in connection with the instructions given to them by such Shareholder pursuant to the Election Form or otherwise in relation to the Repurchase Offer. All questions as to validity, form and eligibility in relation to the Election Form will be determined by the Brokers (who may delegate this power in whole or part to Lloyds TSB Registrars) and such determination shall be final and binding. No authority conferred by or agreed to by execution of the Election Form shall be affected by, and all such authority shall survive, the death or incapacity of the Shareholder executing such form. All obligations of such Shareholder shall be binding upon the heirs, personal representatives, successors and assigns of such Shareholder. If you wish to withdraw your acceptance of the Repurchase Offer, you may do this by writing to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA, stating the exact number of shares for which you had originally accepted the Repurchase Offer. In order validly to withdraw your acceptance, this letter must be received by not later than p.m. on 26 October Cazenove will be acting as a market maker in C Shares and accordingly may effect sales and purchases of C Shares otherwise than under the Repurchase Offer. The C Shares have not been and will not be marketed (i.e. issued to the public for cash through the stock market). No listing for the C Shares will be sought other than on the Official List. The C Shares will be in registered form, but may be settled through CREST. The Repurchase Offer will not be made in the United States and the election of the Repurchase Offer will constitute a representation and warranty that the Shareholder is not in the United States. 6.B.24 4 Overseas Shareholders Shareholders who are not resident in the United Kingdom or who are citizens, residents or nationals of other countries should consult their professional advisers to ascertain whether the Return of Cash to them (including the issue or disposal of the C Shares) will be subject to any restrictions or require compliance with any formalities imposed by the laws or regulations of, or any body or authority located in, the jurisdiction in which they are resident or to which they are subject. In particular, it is the responsibility of any Overseas Shareholder wishing to tender the C Shares into the Repurchase Offer or take receipt of the Initial C Share Dividend to satisfy himself as to full observance of the laws of each relevant jurisdiction in connection with the Return of Cash, including the obtaining of any government, exchange control or other consents which may be required, or the compliance with other necessary formalities needing to be observed and the payment of any issue, transfer or other taxes or duties in such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document comes should inform themselves about and observe any such restrictions. Neither this document nor any other document issued or to be issued by or on behalf of WHSmith in connection with the issue or repurchase of C Shares or the Initial C Share Dividend constitutes an invitation, offer or other action on the part of WHSmith in any jurisdiction in which such invitation, offer or other action is unlawful. The Repurchase Offer is not being made in the United States and Shareholders in the United States may not elect for the Repurchase Offer alternative. Any purported election for the Repurchase Offer alternative may be deemed by the Company to be an election for the Initial C Share Dividend. 15