On Friday, Borders Group (BGP) announced a private placement with financier Bennett LeBow of $25 million equity stake. LeBow grabbed 11.1 million shares for $2.25 per share and in one fell swoop became the company’s largest shareholder, pushing aside Bill Ackman’s Pershing Square Capital Management. The deal is highly dilutive to current shareholders as it grows the current shares outstanding by 19% to 70.9 million in total. Furthermore, the deal also nets LeBow an additional 35.1 million warrants to buy shares at the $2.25 level pending shareholder approval.
Borders Group intends to use the capital in order to revamp its website and market its new low cost eReader. We recently wrote about Border’s new eBook strategy (Borders Banking on the Low End of eReader Market), as digital book sales are growing far more rapidly than physical book sales. Borders is working to cut costs and close stores as the
second largest US book retailer has not been profitable for four straight years and sales are more than one-third lower than they were five years ago. Clearly, a change in strategy is necessary, but Borders long term success appears to rest with the cheap, simple Kobo eReader which will compete directly with Amazon’s (AMZN) Kindle and Apple’s (AAPL) iPad.
LeBow, a long time chairman of tobacco holding company Vector Group, will actively participate in his investment as he will take over chairmanship at Borders Group. Interestingly, the market has cheered the move as Borders traded as much as 9% higher on Friday despite the massive dilution, however it has come off that level and traded just about even late in the day (still impressive consider 19% more shares outstanding). It appears the shake-up in management is being seen as a positive at this time, but we have to believe the market will react negatively to the increased share base, especially if the more than 35 million warrants are approved. After all, coming into the day there were under 60 million shares outstanding.
At Ockham, we are reaffirming our Fairly Valued stance on BGP as of this week’s report. Of course, we will learn more about the how the company is performing when they report earnings next week, but we are not expecting Borders to show a profitable quarter. Coming into the day, BGP was trading for just .05x sales per share, which is well below the historically normal price-to-sales valuation range for BGP of 0.17x to 0.33x. The stock is appealing as far as per share valuations are concerned, but remember the share base grew massively today. Current shareholders have been greatly diluted, but if they use the capital wisely and pull BGP into the black no one will complain; least of all Mr. LeBow who has the potential to own 46 million shares.
