Rocket Bomber - article - retail - business - Borders - B&N - and Business [updated]

Update 9:00AM 1 Apr: Borders secures $700MM credit line, $90MM cash up front

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Incredibly, I’ve been following the Borders story for more than two years — and almost as incredibly, the post I first wrote about Borders back in March of 2008 is still current, and valid:

The only way B&N will buy Borders is if Borders goes bankrupt first — if the price is cheap enough then I think it’s obvious that someone will buy it, even with the headaches.
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Borders has $500 million in debt. In contrast, Barnes & Noble has a cash reserve that they’ve been using to buy back their own stock.
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Again, my opinion: but damn, William Ackman seems like a grade-A prick. I’d hate to deal with him professionally.

Ackman’s past experience consists of (i.e. he used someone else’s dollars to buy) positions in McDonald’s and Wendy’s, so yeah sure maybe he knows something of the “consumer market” — If one thinks fast food equates to booksales — it’s all retail, right? [if you didn’t catch my sarcasm: no. no it’s not]

Pershing-slash-Ackman have also bought a goodly chunk of Barnes & Noble, somewhere in the neighborhood of 6 million shares — and they’ve owned that many since at least the end of ‘06. If talk comes to a buyout by B&N (unlikely, as noted above) then Ackman is hardly an uninterested party to the discussion.

Ackman and “Wall Street” (whoever they are) want B&N to buy Borders, and that’s why you’ll hear about it in the news in the upcoming weeks, and months, and IMO years, but…

It’s about as stupid a combination as I can think of. If B&N wants more stores, they’ll just use their cash reserves and open more brand new stores

Since I wrote that in ’08, Ackman has divested himself of his B&N stake, presumably to difuse criticism exactly like my snarky comments quoted above, but I’m not buying it. As recently as February Ackman is still, still clinging to the hope that B&N will come riding up on a white horse and justify his pissing money down a hole with an instant winning-lottery-ticket-like redemption.

This is my sixth Borders post; Here, have some links:

• Borders doesn’t care if you buy books online from them or not, apparently.
• Borders: the Crystal Ball Report
• Borders Redux.
• More Borders, and Matt’s personal pipe dream.
• The Other Shoe: Borders partners with Indigo’s Shortcovers for E-Books

Two years on, and Borders is still up to their ears in debt (some of it — a key $42 Million loan, of note — owed to Ackman’s Pershing Square Capital Management group) while B&N still has cash reserves and a pre-negotiated billion dollar line-of-credit — yes, that’s billion with a ‘B’

And B&N isn’t going to buy Borders — not unless Borders goes through bankruptcy first, such that B&N (or any other potential buyer) can cherry-pick the assets & locations left after the whole deal goes south: in a competitive environment where both business have multiple locations in the same markets no one is going to buy out their competitor unless they get to discard out of hand those locations that overlap with other, currently ongoing (profitable) stores.

And on top of that B&N has, in the past year, already concluded the purchase of another bookstore chain:

Sure, you didn’t hear about it; or if you heard about it you didn’t do more than skim the PR, because it was in fact, B&N buying out B&N:

New York, NY (August 10, 2009)—Barnes & Noble, Inc. (“BKS”) (NYSE: BKS), the world’s largest bookseller, today announced a definitive agreement to acquire privately held Barnes & Noble College Booksellers, Inc. (“College”), a leading contract operator of college bookstores in the United States, in a transaction valued at $596 million, or approximately $460 million net of College’s cash on hand on the expected closing date.

The company also announced that concurrent with the signing of the definitive agreement to acquire College, BKS has received commitment letters on a new $1 billion, four-year revolving credit facility, which will replace each of BKS’ and College’s existing credit facilities. BKS will finance the transaction through $250 million of seller financing, with the remainder coming from the new credit facility and cash on hand.

College operates 624 college bookstores through multi-year management services contracts, serving nearly 4 million students and over 250,000 faculty members at colleges and universities across the United States. Founded in 1965, College has a diversified, predictable and growing revenue stream derived from the sale of textbooks and course-related materials, emblematic apparel and gifts, trade books, school and dorm supplies, and convenience and café items.

The College business is different; almost always, the campus owns the bookstore, and B&N (formally B&N College Booksellers) merely held a contract to supply books, run the bookstore, and skip away at the end of the year, laughing, with the profits. How a contract to run a college bookstore differs from a traditional lease is a business exercise I leave to the reader; let’s just say that it’s profitable enough that when Len Riggio decided to take B&N public in Sept. of 1993 he kept the college bookstore business for himself — and ran Barnes & Noble College Booksellers as a privately-held company (which, incidentally, held full title and all rights to the Barnes & Noble name exclusively — you know, despite the multi-billion dollar publicly traded corporation down the street which was the public face of Barnes & Noble but only got to use the name because of the charity of B&N-College-slash-Len-Riggio)

So on 10 Aug 2009, when B&N announced it was purchasing B&N College Booksellers, it was more a matter of the chairman of a publicly traded corporation announcing that the firm in which he (and his family) own a majority stake would purchase, for hundreds of millions of dollars, a privately held company of which he (and his family and close friends) were sole owners, for Hundreds of Millions of Dollars — and one of the reasons cited was a 17-year-old dick move on the part of said chairman when he set up an IPO for a publicly traded company whose very name and trademarks were to be wholly owned by his pocket company, which was not to be part of the IPO, and which just happened to be in the same business.

Here I should insert this disclaimer: Hi, my name is Matt Blind and I am one of the managers who run a Barnes & Noble branch [store #1907] in Buckhead, Atlanta, 30305. I am an employee of B&N, and a ‘stake holder’ and at least potentially: privy to knowledge not known to the general public. Actually, past the fact that I wasn’t given a pay raise this past year, all other information in this post is not only publicly available, but is also part of the B&N ‘investor relations’ site: that is to say, my employer wants this information to be out there. [though, perhaps without my spin on it.]

And I should say, I am in fact in favor of B&N’s purchase of B&N College; though it strikes me that if the economy hadn’t nose-dived, Mr. Riggio would have been quite happy to run his two Barnes & Nobles independently, indefinitely. (I’m thinking it was only a cash crunch that forced Len into selling out to himself.)

What pisses me off more, though is the 25¢ per quarter dividend that has been paid to B&N shareholders—without fail—for the past two years even as the economy faltered & overall sales declined; a 25¢ per quarter, per share dividend – times 57 Million outstanding shares – that’s an additional drain on the company to the tune of $14 Million dollars every three months.

Dude. You asked me to forego a pay raise this past year, and we’re paying out $57MM in dividends?

If I were to attempt a thought experiment (no accusation or actual correspondence to reality cited or implied) why, $57 Million, spread across 800 stores with, say, 7 key-holding managers in each store… why, that’d be an extra $10,000 per manager, per store, across the entire chain.

Even after taking on 600-700 College Bookstores, the same math yeilds a pay raise of $5000 for every member of field management — you know, the folks who are actually working to sell the damn books — especially in an environment when you ask managers and other full-time booksellers to take on even more as you, as corporate officers, insist that individual bookstores cut overall payroll and do more with less.

I love my job.

I not bitter,

much.

But asking folks to forego what amounts to a cost-of-living adjustment while one not only banks a $1-per-share-a-year paycheck but also enacts an insider deal that pays off Millions: dude. No, really, Dude. Are you running a retailer, or are you just cashing in at this point?

Not that cashing in on an investment is a bad thing, necessarily. Or a bad business move, for all that. It’s an excellent move in business terms and corporate board members and CEOs and other top management are not in the business of being nice guys: they’re in the business of business, and making money for shareholders, or themselves (though often the two are the same thing). But: for a number of us who work at your “investment” — a little warning would be a common courtesy; and If You Are In Fact Cashing Out: you need to let not only your employees know, but also the SEC- else your going to see some really bad repercussions down the line.

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Anyway: your takeaway as a customer (or publisher, or competing retailer, or interested observer of the market) is that B&N as a company quietly doubled in size, though in fact it’s just a semantic deal and on a street level it’s not like they immediately changed the signs on 624 college campus bookstores: these were already branded “Barnes & Noble” — so the number of publicly visible storefronts remains the same, but now we all know there weren’t a mere 800 B&N superstores, as has been plugged in annual reports and other PR for years: the actual number is over 1400.

Borders seems that much smaller in comparison, now. (Not that small is bad; on a individual-consumer-and-community scale you really only need one bookstore, and it doesn’t have to be part of a chain)

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Borders hasn’t been standing still.

(well, in point of fact is seems like they’ve been sliding backwards, but:)

They’ve refocused on books, eliminating CD and DVD sales in all but a handful of locations, and using the newly liberated floor-space to sell more genre fiction: more mystery, more sci-fi — & more graphic novels: the company rolled out Borders Ink Teen Shops, “special boutique-like sections within most Borders superstores that feature Young Adult as well as Graphic Novel and Manga titles along with a number of other trendy products that complement the book offerings. Items include Twilight bookmarks, lunch boxes, bag clips, trading cards as well trendy products from tokidoki, NARUTO by VIZ Media and Domo among other lifestyle brands. Borders is also dialoging with teens about books and other topics via its Borders Ink Facebook® page, which complements the Borders Ink Teen Shops.”

You might have missed the Borders Ink store-within-a-store concept, because even in the press release that announced it, the new teen offerings were buried in an avalanche of educational toys, games, plush and other offerings for readers from 3 to 12. Borders obviously placed a bet, that el-hi, teen fiction, and yes, manga would continue to offer steady sales and the best potential for growth, even in a down market.

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The important news is that Borders dodged an important deadline: they secured alternate financing and will be able to pay off the $42.5MM loan floated by Pershing Square that helped the company survive last year, when credit was tight and few had faith in retail generally or Borders specifically; that’s the link that led the post.

additional reading and references:

21 July 2009, The Wall Street Journal on the Borders Ink initiative. See also, 22 July 2009 ICv2 and Publishers Weekly on the same topic, or look into the ‘teen’ section of the Borders website for yourself.

12 Sep. 2009, The Detroit News on Borders updates and efforts going into the holidays…

27 Jan. 2010, and The Detroit News again on the departure of CEO Ron Marshall after Border’s ’09 4th quarter sales, in business terms, sucked. Marshal was replaced by executive VP and chief merchandising officer Michael Edwards. [editorial: a good move, as they promoted not an accountant, or another outsider, but rather the guy selling books]

31 Jan. 2010, AnnArbor.com on the costs of rent, and more trouble looming on the horizon. (the far horizon, as the article quotes hypothetical costs out to 2041… but some of the other points are well taken if not entirely valid)

3 Feb. 2010, ICv2 and Publishers Weekly both quoting Ackman on the ‘unlikely’ Borders bankruptcy — and his delusions about industry consolidation in book retail.

And of course, a couple of links from earlier this week: Forbes and Business Week both reporting that Borders was close to a deal to refinance their debt, which was in fact announced this morning

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Borders has a new, March 2014 deadline on all that new credit, and bought quite a bit of breathing room, for both the economy to improve and their merchandising bets to pay off. Ackman still owns a large chunk of the company but he no longer holds the knife; and actually, his bet on Borders will likely pay off too, with a fine margin — if he can hold on for 10 or 15 years. (Most fund managers don’t think that far ahead.)

[B&N also has a new CEO, well, close to 2 new CEOs as they promoted William Lynch from .com to overall oversight, while also bumping Mitch Klipper from COO to CEO of the Retail Division. (Retail is still a bigger chunk by a factor of 9-to-1; though digital sales are growing by double digits annually, so that’s where B&N will focus their business even if it doesn’t make sense as a bookseller. Business and corporate first, afterall.) In related news, B&N also has a new EVP for Operations and Customer Service, Dan Gilbert, whose job in part is to make sure books get delivered. So it’s not all bad.]

And maybe I’ll revisit the subject of Borders again, in 6 or 8 months.

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Update 2 April 2010: B&N has their own activist investor to worry about.

Reuters article from 13 Nov 09, Burkle ups Barnes & Noble stake, cites concerns. Burkle, or rather his investment company Yucaipa currently owns 18.7% of B&N, and desperately wants more.

31 March 10, Burkle seeks independent Barnes & Noble directors — there’s going to be a showdown of some sort at the next shareholders meeting.

Also from 31 March, the Economist opines The sickliest part of the books business is the shops that sell them