Chapter 11 Auction Of Borders’ Intellectual Property To Be Held On September 14th. Likely Suitors Include Amazon, Barnes & Noble, And Apple.
Borders Books, which also owns the Waldenbooks and Brentano’s names, filed Chapter 11 in February.
The financially troubled company first attempted to restructure, and then to sell itself as a going concern in the bankruptcy, but failed. With going-out-of-business sales of inventory now nearing completion, the intellectual property and other intangibles are all that remain to be sold. These assets, which include trademarks, service marks, trade names, logos, internet domain names, and customer information, will be sold on September 14th according to DailyDAC, LLC.
The Sale Process
The bankruptcy auction of Borders’ intellectual property assets will be held on September 14th, with initial bids due on September 8th. Given that e-books appear to be the future of book sales, here is a question: who will come to the sale?
The sale process is being conducted by Streambank, LLC. Steambank has advised a number of Chapter 11 debtors on their intellectual property dispositions.
According to David Peress, a principal with Streambank, “Borders provides the opportunity for any company who is touching consumers in the consumer electronic world.” Consequently, expected suitors include department stores and other large retailers, consumer electronics companies, and digital portals. Nonetheless, as Peress ackowledged, “even with a great name and great products, you still aren’t guaranteed success.”
Are Book Stores Irrelevant?
Some industry pundits surveyed for this article expressed skepticism that anyone would pay very much for these assets, comparing the situation to the bankruptcies of record stores that started to occur about a decade ago. Barnes & Noble, for example, is forecasting that sales of its Nook e-reader and e-books will more than double this fiscal year, to $1.8 billion.
Rick Rosenbloom, a principal with Fuel Break Capital Partners stated: “I think that this sale in particular could be a litmus test as to whether old economy brands disassociated with their original purpose are valuable in the new economy.”
Rosenbloom noted further “Borders is an extremely recognizable brand but solely as a bricks and mortar bookstore with a specific big box experience. I am unsure whether the name itself disconnected from the original platform has significant value going forward.”
Just as downloaded music helped to bury record stores beginning in the late 1990s, there appears to be a general view that e-books have made the bookstore model irrelevant.
But is this right?Amazon, Barnes & Noble, and Apple dominate the e-book business in a way that no company dominated music in the early days of music downloading. In other words, it was pirating that killed the record stores. iTunes came later. And, each of these companies could benefit from a hard (brick and mortar) retail presence.
Jonathan Friedland, with Chicago-based Levenfeld Pearlstein, is an M&A attorney specializing in distressed transactions. Friedland, who represented Musicland Corporation (owner of Sam Goody, Suncoast Motion Picture Company and the Media Play Superstore Chain) in its 2006 Chapter 11 and sale to Trans World Entertainment, pointed out “even a business that has a near certain time of death can be sold for the right price. Well run, properly capitalized book stores make money and can continue to do so in the short term. People are not buying as many hard copy books as they once did, perhaps, but it will be a long time before people completely stop buying books.”
TWE was a smart buyer. Musicland, at its peak, was 1,300 stores. According to Friedland, “TWE bought just 400 and closed about 50 of those right away. It then negotiated hard with landlords for cheaper rent.” A buyer of the Borders’ IP can put itself in a similar position.
A company to look at for an analogy is Redbox, according to Friedland. “Assuming, for argument’s sake,” Friedland said, “that Redbox does not reinvent itself, it will die sometime in the foreseeable future because nearly all videos and games will eventually become delivered through cables and wire” Nonetheless, Friedland went on to say “Redbox will not die overnight but instead will experience a shrinking market, perhaps for many years to come. A smart buyer could make conservative assumptions about the rate of decline and present-value those estimated future earnings to arrive at a purchase price that makes sense.”
Books Are Not CDs
By their very nature, cds are not something a consumer comes into a store in the same way they do books. Further, there is a social experience about being in a book store that one does not get if one does not go into the store.
Another fundamental difference between Borders’ situation and that of record stores in the 90′s and early 2000′s is the very fact that each of the three giants- Amazon, Barnes & Noble, and Apple- have a reason to want Borders’ IP, as does one other important player (or, to be precise, group of players): publishers. This will surely produce a competitive sale of the IP.
Will Publishers Diversify Down Vertically to Combat Amazon?
Let’s take these one at a time. First, publishers fear Amazon. In a recent NPR interview, Mike Shatzkin, the Founder and CEO of The Idea Logical Company, a publishing industry consulting firm, aptly noted that publishers such as Random House, Simon & Shuster, Macmillan and Harpers & Collins understand that “the ground is shifting dramatically beneath them.” He pointed out that self-help guru Timothy Ferris recently signed with Amazon’s publishing unit.
That’s right: Amazon has a publishing unit. And as more authors sign with Amazon, traditional publishers will lose market share to it. Might a traditional publisher or a consortium of traditional publishers make a bid for the Borders’ IP, so it can be a vertical manufacturer and seller of books, like Amazon is becoming?
What About Amazon?
Amazon, too, should be interested for no other reason than to prevent the publishers from getting these assets. Also, because (as noted above) selling books at brick and mortar stores is not dead and won’t be dead for some time to come, being able to open some numbers of stores under the Borders (and/or Waldenbooks and Brentano names) clearly can be profitable if the price is right.
And, just as old line retailers all have a web presence today, isn’t it just a matter of time before Amazon decides it should have a physical presence? The Borders’ name may be a good way to execute that. If Barnes & Noble refuses to stock Amazon-published books unless they are made available for the Nook, then that presents another reason why Amazon may want to have a physical presence.
Finally, the Nook may be the biggest reason why Amazon would benefit from a physical presence. Barnes & Nobles’ retail stores serve as a place consumers can come to test out a Nook. Sure, Kindles are available at Target and other retailers, but the people who go to book stores have a trait that helps sell e-book readers: they like books. When someone goes to Best Buy or Target, books are not usually on their mind.
Barnes & Noble, Apple, and Others
A lot of companies, including Barnes & Noble, Apple, and others have real strategic reasons to own, or at least prevent someone else, from owning the Borders IP. Omar Mirza, an investment banker with Ernst & Young Capital Advisors LLC in New York, stated, “I expect that Amazon or Barnes & Nobles will be bidders . . . they are existing competitors and have the ability to drop these assets straight into their existing platforms.”
And, even if no strategic buyer comes to the party, financial buyers surely will take advantage of this discounted buying opportunity. Bookselling is a business that is well understood; conservative revenue projections can be made and, as Friedland pointed out, discounted to present value as this maturing industry continues to evolve and re-shape.
In less than a year, people will again be able to shop in stores called Border’s. People will be able to sit in the café with friends, and they will have a wide selection of goods to buy, in addition to books. Maybe they will even be able to buy an iPad or Kindle there as well.
DailyDAC is a subscription-based deal aggregator focused on lower middle market, time sensitive situations.
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