The Bookseller.com

21st November 2008

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Behind the Borders deal

24.09.07 Graeme Neill and Joel Rickett

Borders Group's decision this March to decouple its international operations—including its UK and Irish business—sent shockwaves around the book industry. Many publishers feared that if the chain was to vanish completely, due to a takeover by a rival or even a non-book retailer, it could seriously damage their own businesses. Since he joined in March 2006, Borders' ambitious c.e.o. David Roche has been applauded for offering an upbeat, distinctive approach, but there were serious fears that Borders could disappear as an independent force.

It was no surprise that Roche quickly emerged as the frontrunner for control of the business. A recent BA president, he was seen by Borders Group c.e.o. George Jones to provide strong management across a range of good stores. The group was also keeping control of the Paperchase concessions within the UK stores and it seemed prudent to hand over the business to a safe pair of hands. Publicly Roche remained tight-lipped about a possible management buyout, apart from dropping the occasional hint. Collecting the Chain Bookselling Company of the Year Award at the Nibbies in May, he said: "Que sera sera—but if I have anything to do with it we'll see."

Trade rivals used the opportunity to pore over Borders' finances. Irish chain Hughes & Hughes wished to cherry-pick Borders' lucrative airport stores. Former Hammicks and WH Smith chief Trevor Goul-Wheeker seemed a likely challenger after he quit his role at recruitment consultancy Reed Health Group during the summer. Ottakar's founder James Heneage at one point considered teaming up with Roche but later decided not to pursue a deal.

The most serious challenger to an m.b.o. emerged as W H Smith, reported to have reached a shortlist of bidders complied by investment bank Merrill Lynch. Publishers feared that WHS would snap up the business cheaply, close down many of the Borders sites and roll the profitable stores into its own operation. Others predicted that c.e.o. Kate Swann would look to keep the brands distinct while merging back office functions to cut costs.

Despite suggestions that Roche would be backed by Greek private equity firm NBGI, Channel 4 chairman Luke Johnson emerged as Roche's backer in August. Johnson is highly regarded by the City for his transformation of Pizza Express into a business worth half a billion pounds. The partnership seems a smart match. Johnson's tenacity and competitive sense meant it was no surprise that his former Sunday Telegraph column was called "The Maverick".

His personality should dovetail well with Roche's driven, straight-talking manner. Crucially Johnson has been keen on retaining Roche from day one and wishes to keep the retailer's central identity.

The deal comes against a background of stock market turmoil, with questions surrounding major private equity deals. But Roche has been lauded by Borders staff for keeping them informed of the business' future during this uncertain time. The head office team has largely remained intact and has kept staff aware of any changes that may affect them. "David and the senior management team made a genuine effort to keep all members of the business updated on what was going on," said one colleague. "This was really well received and helped to keep everyone calm and focused."

It helps that Borders has had a solid summer, with some standout weeks aided by favourable weather conditions, Richard & Judy's summer reads and of course Harry Potter. The chain has kept up a stream of new initiatives, including dedicated bays for small publishers, involving shop floor staff in promotional selections, and restructuring its buying team. The parlous state of the Borders store estate has also been over-exaggerated, according to company sources. While it is no secret that most of the Books Etc sites have long been on the property market, the majority of the City and out-of-town superstores are said to be solidly profitable. The Starbucks exclusive partnership is lucrative and continues to draw people to spend long hours in the stores. However, despite the short-term future of Borders being resolved, there are fears about the business in the years ahead. Book chains are feeling the squeeze as supermarkets and internet retailers flex their muscles.

Waterstone's 10% cut in floor space is ongoing and WHS under Swann's watch has been ruthless in cutting costs. Borders UK's expansion to one million square feet of retail space has been underwritten by its parent company and observers have questioned whether it will be able to thrive cut loose from its parent's purse strings. The company requires an estimated £20m worth of investment to fund new systems, redevelop retail space and launch a build web presence. Roche and Johnson will need to come up with some creative ways of filling the space vacated by CDs and slower-turning academic textbooks; the DVDs and magazines markets are also gradually being eroded. As high street retailing becomes more ferocious it will be fascinating to see how Borders fares. But with Roche and Johnson at the helm, it will hardly be dull.

Borders Graeme Neill and Joel Rickett