Walcott's finest hour was probably when he was terrifying Barca at the nou camp on the right wing, then second was probably his hat trick for England as a kid. He is still capable of that in my opinion but his career is a mess at the moment.
A manager will always think that they can get a tune out of a player when someone else can't. It's not necessarily anyone's fault that he has stagnated but arsenal is a very weird club in that they want to push development but are hamstrung by the demand to succeed because of such financial strength. Basically they've never found that balance or Wenger hasn't been decisive enough to commit to a successful team above all else. The result is bunch of players who, unless they are supremely talented, end up in and out of the team, and I think players like Walcott and Oxlade-Chamberlain have suffered most.
I'd be happy with a loan with a view to buy in the summer but it looks like that isn't on the cards. On the other hand, I think this might drag but that's OK - we are in a relationship strong position for once because of the state of Arsenal and Walcott's career. We can afford to drive a hard bargain, but Walcott must be committed enough to drop wages and want to play. If he does that then great, but if there's any doubt then we should run a mile.