Wednesday, June 6, 2007

Borders (BGP) + Barnes & Noble (BKS) Not Whole Foods (WFMI) + Wild Oats (OATS)

Borders Group (BGP) was downgraded to Sell from Neutral at Goldman Sachs. The firm believes a merger with Barnes & Noble (BKS) is less likely following the FTC's decision to oppose the Whole Foods Market (WFMI) and Wild Oats Markets (OATS) deal. This kind of like comparing apples to, well, books.

In 2006, Amazon (AMZN) sold over $7 billion worth of books worldwide and a combined Borders / Barnes & Noble would sell about $8.5 billion. What is being overlooked here is the # of duplicate stores that would need to be closed, affecting total sales. This is not a 1+1=2 equation. This is more of a 1+1=1.5 equation.

What would be improved from the merger would be profitability, rather that size. Borders is currently going downhill fast and has not had a profitable quarter in over a year now. Cash flow, negative in 2004 and 2005 was positive in 2006 only because of $317 million in borrowing. Borders need to merge to survive, not create a powerhouse. With national bookstore sales declining and less than 10% of it's books sold online (Borders jointly owns it's site with Amazon), a Barnes & Noble-Borders combination is not going to challenge Amazon anytime soon, it just assures they survive.

In 2006 Borders lost $73 million (and looks to lose more in 2007) and Barnes & Noble had a $150 million profit. Those are not exactly monopoly fear inducing numbers when you compare it to the $460 to $590 million in profits Amazon projects. Of course not all of that is book, 70% of Amazon's revenue is from books. Even a conservative estimate places it's profit from books at over twice that of Barnes & Noble. Monopoly considerations are almost always due to consumer pricing concerns, Amazon dictates pricing to both Borders and Barnes and Noble, a combination of the two will alleviate cost pressures and enable the combined entity to better compete with Amazon on price and customers will benefit, thus the FTC would approve the merger with certain considerations. Heck, if they just wait long enough, Borders will probably go under and Barnes & Noble can just pick it up on the cheap.

Would there be divestitures? Sure. Would the combination be more profitable? That would be the point of doing it, right?

Would I be an investor in either now? Hell no. But not buying shares based on FTC concerns is misplaced.

blogger templates | Make Money Online