Thursday, November 29, 2007

Ackman Increases Stake in Borders: Why?

I am trying to understand what Bill Ackman sees in Borders (BGP)

According to a filing with the SEC, Bill Ackman's Pershing Square Capital Management disclosed an increased 17.1% stake in bookseller Borders Group, up from 12%. Last week management said Q4 earnings, excluding restructuring charges, will exceed last year's earnings from continuing operations of around $1.48 per share. Now that improvement is only about $1 million dollars, it is not like they knocked it out of the park here. They attributed the difference to both the fear of lead in toys and a strong best-seller lineup.

I noted this "no toy" trend last week in a "Black Friday" post that I observed very few toys being taken to the register at several locations.

Now, in an Oct. 9 SEC filing, Ackman's Pershing Square said it did not believe its
"activities would effect a change of control" at the book seller. Simply put, Ackman is playing this as a ValuePlay story, not as an activist investor pushing for change at the top.

What to see in Borders? Shares trade at 1/2 their 52 week high and sit at $12 a each and CEO George Jones has ponied up $1.2 million for 100,000 shares in the past two months. After that? I just cannot find much. They sold off their UK operations, big box discounters like Wal-Mart (WMT) and Target (TGT) are crushing margins and online retailers like Amazon (AMZN) and Ebay (EBAY) are taking traffic the thought of a meaningful online business away from them. The only reason I can find to buy shares is in the hope they merge with Barnes and Nobel (BKS) who is actually making money. But, why would BKS want it? Borders does have almost no debt and about $1.10 a share in cash. Taking it over would not hinder the balance sheet at Barnes and Nobel.

It would enable them to sell off duplicate locations and effectively eliminate foot traffic competition. The FTC might have something to say about it but they so far have been unable to stop anyone who wants to merge so it is doubtful they would be able to actually do anything even if they did object.

Now, there must be something else there or Ackman knows something we don't. The merger of the two have been rumored for about a year now and with both CEO's buying shares in the company, that assures it is far off. The SEC would be all over both companies were a merger announced anytime soon after insiders were seen buying large amounts of shares on the open market.

Borders is a non-factor in the online game so that cannot be it. FY 2008 ending in Jan. will mark the second consecutive year the retailer has lost money and FY 2009 does not look all that much brighter. Sales for the past three years have been essentially stagnant. Personally, I love to read but book are the last thing I want to go to the store for. My first stop is online and does not even come to mind. This simply means that the economics of the company do not have a huge impetus to change anytime soon.

The environment they operate in is getting tougher, not easier and that does not bode well for a "turnaround" story. More digging is in order to find out what Ackman is thinking.

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