B&N Mulls a Borders Buy

An acquisition could help both, but would a tieup of the U.S.'s two biggest booksellers be able to win FTC approval?

Barnes & Noble (BKS), the giant bookseller built through acquisition, may be on the verge of its biggest deal yet as it weighs bidding for top competitor Borders Group (BGP). Analysts say the deal could bolster Barnes & Nobles' bottom line at a price tag, including debt, of well over $1 billion.

Investors are left wondering whether a combination of the top two national book chains could pass antitrust muster. Former government regulators say the question will come down to just how national the book market has become. The growth of Amazon.com (AMZN) and booming book sales by big-box retailers such as Wal-Mart Stores (WMT) and Target (TGT) could provide enough cover to let the once unimaginable deal gain approval.

"There may be a lot of complaining but at the end of the day, it's highly unlikely it would be enough to block it," says Michael McFalls, an attorney at Jones Day in Washington, D.C., who worked at the Federal Trade Commission from 1997 to 2000. Of course, if the FTC turned up damning e-mails or other troubling evidence, all bets would be off, he says. The commission tried to block Whole Foods Market's (WFMI) deal to buy Wild Oats, for example, after finding statements from Whole Foods' CEO about avoiding "nasty price wars." A federal court eventually let the deal go through.

Other Players

Borders, which saw sales decline 2% in its most recent quarter, said on Mar. 20 that it was considering selling all or part of the company. Shares of the Ann Arbor (Mich.) chain have lost almost 70% over the past year as profits slipped. The company reported a net loss of $157 million for 2007.

Prompted by Borders' announcement, Barnes & Noble Chief Operating Officer Mitchell Klipper told analysts his company would "certainly take a good look" at the possible acquisition. Spokeswomen for both companies on May 21 declined to comment on a report in The Wall Street Journal (NWS) that Barnes & Noble had assembled a team of executives and advisers to study a deal. The company could have competition to buy Borders, though. The Journal also reported that 30 people representing a variety of private equity firms and other potential buyers had signed or were likely to sign confidentiality agreements to view Borders' finances.

Shares of Borders rose 9%, to 6.91, on May 21, and are up 36% in the two months since the company announced it was looking for a buyer. Barnes & Noble shares were unchanged at 29.95 on May 21, on volume that was more than double the stock's daily average.

Barnes & Noble CEO Steve Riggio confirmed the newspaper's report during the company's quarterly conference call with analysts on May 22. "We've put together a team of senior management people and financial advisors to study the feasibility of a transaction with Borders," he said. At the same time, Borders issued a statement that said: "The company is in the midst of the strategic alternatives process and has not engaged in substantive discussions regarding any specific transaction to date."

Amazon Effect

Antitrust regulators will look closely at the effects, if any, that Borders stores have on prices and service at nearby Barnes & Noble stores. When Staples (SPLS) sought to buy competitor Office Depot (ODP) in 1997, the Federal Trade Commission discovered that Staples charged lower prices at outlets near Office Depot stores. But when Federated Department Stores (M) sought to buy May Department Stores, the FTC approved, concluding that department stores essentially operated in a national market without regard for the proximity of competing chains.

"If book prices are the same whether or not there's a Borders around, then you are talking about an overall national market," says Deborah Feinstein, a partner at Arnold & Porter in Washington, D.C.

Amazon's impact could also help convince regulators to approve a deal. While 60% of consumers buying books last year shopped at bookstores, 20% bought online and 34% went to bigger retailers like Wal-Mart, according to a survey by Simmons Market Research Bureau. "Bookstores are still the most common place to buy a book, but their share keeps shrinking," says Michael Norris, book publishing analyst at Simba Information, a market research firm in Stamford, Conn.

"Dreary Sameness"

Leonard Riggio, who bought New York-based Barnes & Noble in 1971 for $750,000, built the chain with a series of rapid acquisitions in the 1980s, absorbing competing companies like B. Dalton Bookseller, Doubleday, and Bookstop. But the dealmaking largely ground to a halt after Barnes & Noble was forced to abandon a bid for Ingram Book Group, at the time the largest book wholesaler. Barnes & Noble pulled out of the deal in 1999 after independent booksellers convinced FTC staff to oppose the transaction.

There's likely to be less opposition from independent bookstore owners to a Borders deal. Ingram was in essence a common supplier, not a competitor, to both Barnes & Noble and independent booksellers. Borders is just another big chain.

"The landscape would definitely change, and it would change in the direction of less diversity, less choice, less selection, [and] more sameness everywhere," says Steve Bercu, owner of BookPeople in Austin, Tex., and a member of the board of directors of the American Booksellers Assn. "My bet is on consumers looking for indies as their alternative to dreary sameness."

Before it's here, it's on the Bloomberg Terminal.