Barnes & Noble, Borders Surge as Pershing Mulls Deal

Pershing Offers to Fund Borders Bid for Barnes & Noble
Pedestrians pass a Barnes & Noble store as customers upstairs wait in line for a book signing in New York. Photographer: Jonathan Fickies/Bloomberg

Barnes & Noble Inc. and Borders Group Inc. surged in New York trading after William Ackman’s Pershing Square Capital Management LP offered to work with Borders on a takeover of the bookstore chain’s larger rival.

Ackman’s New York hedge-fund firm is willing to help Borders fund an offer of $16 a share, saying the move would lead to savings, according to a regulatory filing today. Borders reiterated its interest in a deal and in “continuing those discussions,” according to an e-mail from spokeswoman Mary Davis.

The offer price would value Barnes & Noble at about $960 million, based on the shares outstanding. The proposal from Pershing, the largest Borders holder after Chief Executive Officer Bennett LeBow, would combine the two biggest bookstore chains in the U.S. as sales of paper books slump further and digital books become more popular.

“It’s been swirling around for a while, given the challenges in the industry,” said Peter Wahlstrom, a retail analyst at Morningstar in Chicago. “There could be merits to it, but it doesn’t seem like a match made in heaven. I don’t think it solves all that much.”

Barnes & Noble rose $1.41, or 11 percent, to $14.69 at 4:01 p.m. in New York Stock Exchange composite trading, the largest gain since Aug. 4. Borders increased 31 cents, or 29 percent, to $1.39 for the biggest advance since April 1.

Pershing Ownership

Pershing owned about 15 percent of Ann Arbor, Michigan-based Borders’ common stock as of Sept. 30, according to data compiled by Bloomberg. The exercising of warrants and equity swaps could increase that stake to about 42 percent, according to today’s filing.

Bethany Norvell, a spokeswoman for Pershing, wasn’t immediately available for comment. Mary Ellen Keating, a spokeswoman for Barnes & Noble, declined to comment.

The chains face increasing competition as consumers shift to downloading digital books to read on devices such as Inc.’s Kindle. That’s led both companies to invest in digital reading. Barnes & Noble released its Nook e-reader last year, helping it gain about 20 percent of U.S. e-book sales. Borders began selling e-books from its website in July and expanded its e-reader offerings in August.

Bookstores’ Peformance

Even with the investments in digital reading, both chains have lost money. Borders hasn’t reported an annual profit in the past four years and has sold off international operations to raise cash. Sales at Barnes & Noble stores open at least a year have declined for 12 straight quarters and the company has posted a loss in four of the past five three-month periods.

Ackman has a history of buying shares in companies he deems undervalued, and then pursues changes to help boost shareholder returns. He pushed for a share buyback at Target Corp. in 2007 and persuaded Wendy’s International Inc. to spin off its Tim Hortons doughnut chain. Pershing invested in Borders in 2006 and pushed it to close its mall-based stores.

Ackman previously wanted to combine the booksellers, according to court documents and testimony from Barnes & Noble’s lawsuit over a so-called poison pill provision with Ron Burkle’s Yucaipa Cos. Pershing sold a stake of more than 6 million Barnes & Noble shares in 2008.

Notes taken by a Barnes & Noble lawyer during a board meeting recorded founder Leonard Riggio saying that Burkle was working with Ackman, then the largest shareholder in Borders, in pursuing a deal.

Benefiting Both Companies

Burkle also said during testimony that he told Riggio that he had met with Ackman and they discussed Barnes & Noble buying some Borders assets if the company went bankrupt.

A combination would benefit both chains, allowing Borders to reduce its store size and Barnes & Noble to eliminate a competitor, said Jim McTevia of Bingham Farms, Michigan-based McTevia & Associates, a turnaround consultant.

“It’s a smart move, and now is the time to do it,” said McTevia. “You have two troubled companies in a troubled industry in a country where the consumer is troubled. This is in the best interest for the future of both companies.”

Last month, New York-based Barnes & Noble forecast a wider annual loss than initially projected. The company also said then that it’s still completing a strategic review of its options, including a possible sale. Meetings with strategic and financial institutions have taken place and there is no guarantee a transaction will occur, the company said.

Riggio Bid

In October, Riggio agreed to seek approval from the board before joining a group to make a bid for the company. The executive has survived opposition from shareholders such as Burkle’s Yucaipa, which unsuccessfully tried to unseat him from the board this year.

Barnes & Noble shareholders aren’t likely to vote for such a deal, said Michael Souers, an analyst for Standard & Poor’s in New York. Barnes & Noble would have to take on the costs of combining the two companies and at $16 a share, many investors would lose money, he said.

“From Barnes & Noble’s standpoint, there would be very little synergies, if any at all,” said Souers, who recommends holding shares of both chains. “The cost of reducing stores and head count would be prohibitive.”

Borders is scheduled to report third-quarter results Dec. 9. The bookstore chain had $25.1 million in cash and cash equivalents in the quarter ended July 31.


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