Woolworths enters Virgin territory with DVD deal

Woolworths has plugged a hole after losing its key entertainment wholesale contract with Tesco by winning a three-year deal to supply Virgin Retail.

Entertainment UK, which now dwarfs Woolworths' eponymous retail chain, will gain around £250m in annual sales from the deal. It will supply Virgin's music, DVDs, games and books from 1 June.

The news reignited speculation that Woolworths might follow WH Smith's example and demerge its wholesaling business. Shares in Woolworths, which are under pressure amid a bleak outlook for its core high street chain, rose 1.5p to 33.75p yesterday.

Baugur - the Icelandic owner of retailers from House of Fraser to Iceland, and Woolworths' biggest shareholder - has pushed the retailer to consider spinning off EUK and 2entertain, its 40 per cent-owned publishing joint venture with BBC Worldwide.

Trevor Bish-Jones, Woolworths' chief executive, has previously played down the possibility but winning the Virgin contract could change his mind, although nothing imminent is expected.

Analysts said splitting up the group would leave the high street chain dangerously exposed. Christian Koefoed-Nielsen, at Panmure Gordon, said a demerger was "unlikely" due to the problems facing the core chain, which had a dire Christmas despite a major push into the world of online shopping.

EUK will lose its business with Tesco in the middle of this year. It has negotiated a clutch of new deals to compensate, including ones with Wm Morrison, J Sainsbury and WH Smith. Earlier this month, Woolworths announced the £29m acquisition of Bertram, a books wholesaler, in order to diversify EUK's earnings stream.

Sales from all of EUK's new deals mean it will have around £100m more in sales than it had from its contract with Tesco - £1.2bn of annual sales in total.

Analysts said the supply contract would add around £4m to Woolworths' pre-tax profits for this year, lifting City expectations to around £22m.