Elliott versus Readerlink; trade weighs up options as B&N shareholders say deal too low

A group of Barnes & Noble investors has warned a $683m (£537m) deal struck with Waterstones owner Elliott Advisors (UK) undervalues the company and urged the board to consider rival proposals, with US distribution giant Readerlink LLC said to be considering a bid.

In a surprise move announced on Friday (7th June), Elliott entered into an agreement to acquire the firm, in what looked like the end of the retailer's history as a publically listed company, with Waterstones c.e.o. James Daunt poised to become the American bookseller’s chief executive, splitting his time between London and New York, pending shareholder and regulatory approval.

But the plan still hangs in the balance, with Illinois-based Readerlink LLC reportedly considering making a higher bid. Elliott’s agreement contains a “keep-shop” provision, entitling it to $4m if B&N strikes a deal with a third party before midnight on Thursday 13th June. There would be a $17.5m break-up fee after that. At the time of writing this morning (Friday 14th June), there has been no confirmation of the Readerlink bid. 

In a public filing on Thursday, a group led by Barnes & Noble investor Richard Schottenfeld (who is among the top ten investors in B&N), said the Elliott sale, which values the firm at $6.50 per share, is not high enough and failed to maximise value for shareholders. He said the company’s special committee should re-evaluate all offers.

The Readerlink deal would see the largest US distributor to non-trade outlets combining with the country’s biggest book store chain, giving it huge clout across the full range of US book retail. Led by Dennis Abboud and known for its aggressive data-driven approach to push mass-market growth, Readerlink wields a lot of power, selling to huge US names such as Target, Toys ‘R’ Us and Walmart, alongside book clubs and food shops.

Ken Fund, c.o.o. of Quarto, said the developments were “critical” to a firm like his, which generates over half of its business in the US. He said: “Waterstones implemented an interesting localised approach in the UK, which has validity in the US market. Bookselling is a specialist business and consumers expect a more tailored service. We would welcome it, as long as it is an inclusive approach including long-tail illustrated books. Readerlink understands the importance of selling books where people shop and we would find their approach to be refreshing in a market that has shown no growth recently.”

Lorraine Shanley, president of US publishing consultancy Market Partners International, told The Bookseller there was no clear view in the US on which would be the best outcome for the trade. She said: “There’s debate about which one would be better for publishers. Elliott brings a known player, James Daunt, whose reputation is impressive and who clearly understands the book retailing world, on a micro, independent, and macro, chain, level. Readerlink has been enormously successful in mass merchandise channels, and has a very strong team, with great analytics. It’s more of an unknown quantity on the bookstore front, so that might give Elliott an edge.”

However, publishing consultant Mike Shatzkin, founder and c.e.o. of the Idea Logical Company, suggested Readerlink’s investment in technology could be a key factor. He said: “What I find most intriguing, but it is highly speculative, is that Readerlink is the one outfit in the US trade that seems to grasp the benefits of automated inventory management. Employed at scale by a retailer, this could be a game-changer. I don’t know if that’s in its thinking, but it is bound to be when it starts exploring the costs of buying and stocking.” He said the deal would give Readerlink “a lot of power” in the US, but warned: “Since B&N is so shaky, [Readerlink] would be taking on a huge challenge which will require a lot of investment.”

Plot twist

A bidding war for Barnes & Noble caught many by surprise. The chain, which has 627 shops across the 50 states, has struggled in recent times, ending the fiscal year of 28th April 2018 with a loss of $125.5m, and revenues down 6% to $3.7bn.

Readerlink has been tight-lipped about its intentions, but Daunt told The Bookseller the Elliott plan would see him relocate and get to know the US chain, but he would not expect to make major changes to the number of stores or run down its Nook e-book business.

Daunt explained a strong Barnes & Noble was important both to publishers and rival booksellers, saying: “There is an inherent logic to it. Waterstones had faced the same trials and tribulations, and although the retail climate is different in the US, we operate in broadly similar ways. There is also an element of self-interest; it really matters to us that Barnes & Noble can continue to do what it does, and it really matters that publishers can continue to sell print books through these stores, as well as, obviously, through Amazon.”

Daunt admitted he would have to spend a “substantial” amount of time in New York as he got to know the business, with Kate Skipper, c.o.o. of Waterstones, running the UK chain in his absence. He said: “My strategy, as it was when I came to Waterstones, is to understand the business before I come up with any conclusions, but then try to do what is sensible. I have no idea on the Nook yet, but it is really exiting to have that kind of business, particularly where the investment has already been made. At Waterstones I was told, and still get told, that we would have to close stores, but actually it is less about location and more about having the right kind of bookshop in whatever location it is. At Waterstones, we now do very well out of some of the shops that might have been earmarked for closure originally. My motivation is always to keep as many bookshops open as possible, and the US looks quite under-bookshopped, at least compared to the UK.”

While there was no shortage of publishing figures wishing Daunt well in his potential new venture last week, industry observers warned he would face huge challenges. Trevor Goul-Wheeker, chairman of Blackwell’s, said Readerlink would “represent a more complete destination” for B&N because Elliott’s own deal was potentially a short-term acquisition. Waterstones and B&N would be run separately, but the acquisition creates a combined business with sales of £3.3bn, making a future flotation likely.

He explained: “In my mind, the Elliott acquisition of B&N raises the simple question of why? One, Elliott has lost its private equity heads and fallen in love with bookselling—I doubt it. Two, Elliott is going to have B&N bookseller and management costs stripped down, as already achieved at Waterstones, along with duplicated UK/US roles, the first example of which is James’ dual role—although the history of transatlantic roles is littered with casualties, ask any global publisher. Three, Elliott will seek to improve terms significantly through buying muscle and global deals. This could challenge publishers’ territorial restrictions, but UK embargo dates have already been flouted so why not publishers’ territorial restrictions? Four, Elliott will package up both companies for a single sale or flotation: the former is likely to attract the competition authorities’ attention, and the latter will be challenging, potentially painful, but ultimately possible.”

Another country

Retail analyst Nick Bubb said he thought the plan for Daunt to split his time between London and New York was a “terrible idea” that could affect both firms badly. He said: “He can undoubtedly give them some good advice on making the stores more ‘local’, but he will hate working in the US and he won’t be any good at it. There is a risk that Waterstones will miss him and lose momentum.”

Philip Downer, former c.e.o. of Borders UK, now owner of independent retailer Calliope Gifts, echoed Goul-Wheeker by saying there was “potential for disruption to the publishing landscape” from an Elliott deal. He said: “The thing that strikes me is how different the Barnes & Noble proposition is compared to Waterstones. Most Waterstones are traditional British stores, around 1,000 sq ft and most of them are pleasant places to spend your time. But Barnes & Noble stores are different, you’ve got 20,000 to 40,000 sq ft, lots in out-of-town retail parks. From a consumer-facing point of view, many of the good things taking place at Waterstones have been tested in Daunt Books shops over the years, and I can see how it can potentially adjust some of them to Barnes & Noble. But it’s in a different culture and trading environment.”

Agent Clare Alexander sounded a calmer note for the UK book trade, although she admitted there could be pressure on publishers’ discounts and a possible flotation if Elliott won out. She said: “For me, as an agent, the possibility of globalised bookselling feels no more or less threatening than the threat of globalised international publishing.

“But in practice, while there are books and authors suitable for a single global publication and a single approach to selling—most commonly ‘brand’ authors—like politics, there is a strong countervailing force for the local, singular and national. I think James understands this, and it is in this area that Waterstones works like a joined-up indie. I’d expect B&N to follow that model, rather than attempt to go head to head with Amazon.”

Read The Bookseller editor Philip Jones' thoughts on what impact that Barnes & Noble's future will have on the book business here and literary agent Mark Gottlieb's blog about why the sale may help US publishers here.