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Opinion: Borders UK on the block

22.03.07 Neill Denny

So Borders is up for sale in the UK: why has this happened, and what happens next?

A change of management in the US, allied to continuing underperformance domestically, clearly has much to do with it. Like HMV in the UK, Borders in the US is finding it tough to make money in the all-round entertainment business, with music under particular pressure. It lost $150m in 2006 and $73m in the last quarter alone. There has also been a gradual realisation that what works in the specialised circumstance of US retail, with its cheap out of town space and more informal culture, does not necessarily translate lock, stock and barrel to overseas markets.

The news here has clearly come as a major surprise to the British management team, so carefully assembled by David Roche, the new(ish) ceo, and one of his first major tasks is to keep that team focused and motivated during the sale period, which could last many months.

The profitability or not of the UK arm has never been clear and certain commentators have long harboured concerns that books in the UK just cannot sustain a big box retail model because the basic cost of space in the UK is so much higher than in the US.

So who might want to buy Borders? Roche and his team are one obvious answer, and an mbo, possibly even retaining the Borders name in the UK (as Woolworths has done) is one clear possibility. Roche has the drive and the ambition for such a deal; his problem will be finding backers at a time when the whole bricks-and-mortar books model is under such pressure. If this route is taken, expect to see the Books etc sold off. It is just conceivable that an mbo of the Books Etc business could also happen. Perhaps MR Roche could have a word with both Mr Heneage and Mr Waterstone, both of whom have the money and the experience to lend a hand.

Trade buyers for the whole business are very thin on the ground. Waterstone's, which has just announced it plans to reduce space by 10 per cent over the next three years, is unlikely to want or afford the whole of Borders, irrespective of any Competition Commission concerns. Likewise WH Smiths, under the cautious stewardship of Kate Swann, is unlikely to want to swallow the whole chain just now. 72 stores turning over close to £300m plus 2,000 staff is quite a mouthful.

Which leaves two realistic options. One, a piecemeal break-up of the group with some of the best bookselling sites picked off by competitors – Smiths has ten large out-of-town stores and could be in the market for a handful more. Likewise, the travel business could cherry-pick some of the airport stores. Books Etc stores could appeal in small doses to remainder or discount chains like The Works, about the only bookshop chain currently expanding.

The second option is to see the business dismembered with fashion, electricals and furniture filling the out-of-town space. It would be an unfortunate epitaph for what has been one of the boldest and most imaginative attempts to re-invent bookselling in the UK.

Financial Opinion Todays Picks Neill Denny Borders

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