Barnes and Noble Still Considering Borders Purchase

Posted on June 11, 2008

First round bids were due Monday from companies that wish to buy bookseller Borders. Barnes and Noble is one of the companies that is interested. The Financial Times says that Borders has already rejected numerous offers for the company.

On 20 March, Borders announced that it had retained JPMorgan and Merrill Lynch to conduct a strategic review, and on the same day made public a financing commitment with its largest shareholder Pershing Square. Barnes & Noble is conducting due diligence, but is far from establishing whether it will competitively bid for its largest retailer rival, said the first person, who is close to the situation. Though Borders has been cooperative in giving [Barnes & Noble] the information they need during due diligence, the latter still has significant work to do before it fully understands whether a merger now is the right decision, the person said.

After deciding whether an acquisition of Borders is advantageous strategically, the company then needs to evaluate whether it can be bought at a fair value. If Barnes & Noble does decide that a deal now is strategically worth pursuing, it still needs to calculate how and if a transaction would pass with government regulators and publishers, the person said. Borders announced last week an agreement to sell its Australasian assets, and cut about 20% of its corporate work force. The person speculated that these events could indicate a very difficult situation at Borders, and that this would prompt another question for Barnes & Noble and any other participant in the sale process: how much will Borders� financial position deteriorate before a deal is made?

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Currently, Barnes & Noble is assessing whether the costs associated with the business are worth the upside of a deal, the first person said. Borders' enterprise value, currently about USD 935m, will be a sizeable deal for Barnes & Noble, which has a market capitalization of USD 1.65bn. "The size, relative to Barnes & Noble, is not the type of thing most companies would do ... and that's not factoring in the costs of rationalizing the business, so the upside really has to be good to warrant it," the person noted. With Pershing as Barnes & Noble's second largest shareholder - and Borders largest shareholder - Barnes & Noble needs to "assure shareholders that they have looked and considered" a deal, the person said.

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Publishers are unlikely to greet a merger of the two largest retailers in the industry with open arms, and Borders can actually use this dynamic to its advantage by extracting concessions out of these parties, the first person explained. This would free up further capital for its restructuring effort.

If Barnes and Noble buys Borders, you know what will happen. There will be massive layoffs, a consolidation and then there will eventually be only one major bookchain -- other than Books a Million -- left. Look for many more bookstore closings in the future.

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