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?

by Aaron Pressman

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."