W H Smith negotiating the sale of Waterstone's chain

Britain's biggest bookseller W H Smith Group plc sent its shares higher yesterday with a 16 per cent increase in first half profits…

Britain's biggest bookseller W H Smith Group plc sent its shares higher yesterday with a 16 per cent increase in first half profits, plus plans to return cash to investors if it sells specialist book chain Waterstone's.

The retailer said talks to sell Waterstone's, which also operates in Ireland, were underway but it was premature to speculate on their outcome.

Smith revealed this month it was negotiating to sell Waterstone's to music major EMI Group plc and a joint venture partner which includes Waterstone's founder Tim Waterstone.

Finance director Keith Hamill said a substantial proportion of the proceeds could go back to investors. Waterstone's is estimated to be worth around £250£300 million sterling (£212.5-£255 million). Smith's first-half profits were at the top end of expectations and this prompted retail sector analyst to upgrade full year earnings estimates.

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"The results were slightly ahead of expectations on almost every front," said Paribas Capital Markets retail analyst William Cullum.

He envisaged raising his full-year profit forecast up by around £10 million sterling from £136 million sterling.

Chief executive Richard Handover said the chain had seen some very encouraging sales growth, although the pace could slacken in the second half.

Smith is in the process of revamping its core chain, which has found it tough to fend off intense competition from food superstores and other retailers, which now sell many of the same lines such as books, stationery, music and videos.

The overhaul of the main retail chain was announced in October as part of efforts to boost profits and improve returns for shareholders. These included the demerger of Waterstone's and sale of Smith's 75 per cent stake in the music retailing group Virgin/Our Price.

The group's overall results were also helped by some recovery in the music retailing markets and continued strong sales from Waterstone's.