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February 7, 2010 7:40 pm
Barnes & Noble and Borders, the two US national bookstore chains, have both been struggling to attract customers amid changes in book-buying habits. However, they have had more luck with activist investors.
In the middle of uncertainties about the future of the sector, Ron Burkle, the California billionaire, announced last month that his Yucaipa funds held a 19 per cent stake in B&N. Another California fund, Aletheia, which is headed by Peter Eichler, has simultaneously expanded its stake over the past year to 15 per cent.
At smaller rival Borders, Bill Ackman’s Pershing Square has held a controlling 34 per cent for more than a year, a stake steadily built since late 2006.
Mr Ackman has continued to argue that Borders has a future, even as it suffers losses and a fall in its shares to about $1 from more than $20 when he first invested in the company.
Mr Burkle indicated last week that he wanted to own even more of B&N, and to challenge its management, which is headed by Len Riggio, the founder and chairman who in the 1980s and 1990s led the superstore revolution in US bookselling.
The developing bookstore drama is “the clash of the Titans, in terms of the actors and the personalities”, according to David Schick, retail analyst at Stifel Nicolaus. And it is unfolding as the wider industry is focused on a dispute between online bookseller Amazon and publisher Macmillan over the pricing of e-books.
Mr Schick says that the e-books challenge is just a small part of the “massive, massive problems” the two established booksellers have been facing.
Poor holiday sales continued a decline that reflects intense competition not just from Amazon but also from Walmart, Target and Costco’s discount stores, which have taken a large slice out of bestseller sales.
The presence of the big-name investors reflects the drastic nature of the investment proposition in physical bookstores. The stores still deliver cashflow in spite of their falling sales but risk following music store chains such as Tower Records, Virgin Megastores and Sam Goody on the road to oblivion.
“These are big questions,” says Mr Schick. “And you get these big players around who are prepared to make big $500m bets.”
Mr Burkle has in the past targeted his investment on consolidating retail sectors, as with his stake in Wild Oats, the natural and organic supermarket chain, before it was bought by Whole Foods in 2007, and also in Pathmark, a regional supermarket that was bought by A&P supermarkets in 2007.
Mr Ackman has suggested that Borders could end up acquired by B&N, or even by Amazon to add a bricks-and-mortar store component to its online business.
However, when Borders indicated in 2008 that it was prepared to consider a sale of its business, Mr Riggio at B&N did not respond.
If Mr Riggio hopes B&N can profit from Border’s eventual demise, Mr Ackman insisted this week that, in spite of continuing losses at Borders, a bankruptcy was unlikely.
“Ultimately, this industry may consolidate – the two companies may become one, or [Borders] may stay on its own,” he told CNBC, also leaving in a third possibility: that the entire bookstore model could collapse.
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