A Reader’s Thoughts on Barnes & Noble and Borders Article

JB sent me a great message this morning about the Barnes & Noble (BKS) and Borders (BGP) article in the WSJ today. It is well worth a read.

“I’m not sure how much I believe about difficultly in getting bank financing. It seems like CVS (CVS) didn’t have a difficult time and Waste Management (WMI) has received positive feedback from banks regarding the RSG offer. Not to mention the fact that BKS is under levered going into a potential transaction. BKS has 96.83mm in debt and netting out cash has 70.75mm in debt. This represents 5% of the company market cap and is only 20.5% of the estimated 2009 EBITDA.

In addition if BKS were to buy BGP for $10/share financing the transaction with debt, the combined entity would only have a Debt/Ebitda of 2.55x and this is exclusive of any synergies and also uses the current analyst estimated EBITDA where the analyst community for the most part doesn’t include the $120mm in SG&A cuts that BGP has announced ($60mm this year and $60 mm next year). So I find it hard to believe that BKS investment bank wouldn’t see this and would be reluctant to lend.

As far as the concern about the length of leases, without further detail on the financials of each location, according to the 10K over the next 5 years on a cumulative basis BGP domestic super stores have 2.2%, 4.9%, 9.6%, 11.2%, 14.5% of the leases expiring and more importantly the company has (on a cumulative basis) 52.4%, 76.5%, 88.4%, 95.1% and 97.3% of the Walden stores coming off lease. This is important b/c the Walden business loses money and is drag on cash flow. So closing these stores would be a big benefit to a combines entity. While many of the super stores overlap with BKS stores I would think that a controlled closing of overlapping stores could be achieved.

The companies share approximately 112 investors. Below is a list of the top 12 BGP investors who also own a position in BKS. I would think that Pershing Square, T2, Brandywine and Hawkshaw all have talked with both companies about the merits of a combined entity.

Shareholders are listed followed by the % of share held in Borders and then Barnes & Noble

Pershing Square Capital Management= 17.5% , 11.9%
Deutsche Investment Management Americas, Inc.= 6.4%, 0.6%
Barclays Global Investors NA (California)= 4.7% , 2.7%
Vanguard Group, Inc. = 3.2%, 3.1%
T2 Partners Management LP= 2.2%, 0.5%
State Street Global Advisors = 2.2%, 2.5%
Citigroup Global Markets (United States)= 2.0%, 0.3%
Millennium Partners = 1.4%, 0.2%
Brandywine Global Investment Management LLC = 1.2%, 0.5%
Hawkshaw Capital Management LLC= 1.1%, 0.5%
Northern Trust Investments = 1.1%, 0.5%
LSV Asset Management= 1.1%, 5.3%

While the deal would be looked at by the government I think ultimately the companies would be allowed to combine using the argument that online retailers are serious competition. Also I’m not entirely sure what the point of the article is tough b/c it goes though all the reasons why it won’t happen but states that BKS could changes its mind.”

I think maybe it was just a slow news day?

Disclosure (“none” means no position):Long BGP, None