The Bookseller.com

3rd December 2008

Neill Denny is editor-in-chief of The Bookseller. He will be blogging on the book business and on how the print magazine is produced each week.

Break for Borders?

29.08.07

It seems as if a long summer of uncertainty over the future of Borders is drawing to a close A potential saviour for the business has arisen in the intriguing form of Luke Johnson, newspaper columnist, pizza millionaire and chairman of Channel Four.

There are strong indications that Johnson's venture capital firm, Risk Capital Partners, is on the verge of a deal to back a buy-out by Borders' chief executive David Roche. Although RCP has no  book retail specialism, it has a decent track record in retail, media and entertainment generally. Aside from Johnson, one of the four partners is Bobby Hashemi, the founder of Coffee Republic, a useful man to have around to advise on Borders' Starbucks offer. More widely, RCP has retail experience through stakes in fashion chain East and DIY business Topps Tiles.

But Johnson is the key player in all of this. He made his name with the dramatic success of Pizza Express, which he transformed in the 1990s from a 12 strong minnow into a 250 strong chain valued at 500m. He has at one time owned restaurant businesses The Ivy and Strada, and has a host of investment experience from gambling to dentistry. For the last three years he has been somewhat unlikely chairman of Channel 4, a period which has seen ratings success go hand in hand with controversy. For much of the last decade he has used a column in The Sunday Telegraph, and latterly the Financial Times, to dispense pithy business advice. (His is the son of the  noted journalist and right wing historian Paul Johnson). Certainly he will find all his expertise essential if he is to rebuild Borders. With large stores in a flat market, and under pressure from discounting, the internet and the supermarkets, it represents quite a challenge.

However, a combination of Roche and Johnson would bring formidable energy, experience and resources to the party. It would also play well with the US owners, who would rather sell the business at one fell swoop than get involved in a messy break-up strategy with the likes of Waterstones and WH Smith's cherry-picking stores. Johnson's buccaneering style may put a few noses out of joint. "Sadly this is an age of grey bosses and pygmy leaders," he has written, "Too few have real flair or a sense of high drama about them. The characters have been replaced by committees. Many 21st century 'leaders' are simply adminstrators or over-promoted bureaucrats." Hang on to your hats.

For eight years Johnson was a columnist for the Sunday Telegraph. Here is a selection of some of his comments:

On publishing
My experience of book publishing is it is a capital intensive industry – book advances and production costs have to be funded up-front, sometimes years ahead.

On Riverdeep's highly leverage purchase of Houghton Mifflin
The entire tale has so many characteristics of our times: two companies with years of reported net losses – but no one seems to care; endless refinancings at higher values, while private equity firms book huge cash profits in record time; a very young Irish financier turning into an incredibly bullish industrialist; lucrative fees ($91m on this deal alone) at every turn for the advisers; and a financing structure built on mountains of debt, all at stratospheric multiples, with no hope of ever paying off the principal through operations.

On raising finance
The feeblest excuse ever given by a would-be entrepreneur is that they can't raise the start-up capital to get going. In fact there is more funding sloshing around than ever before. Anyone who can't find money right now doesn't have the determination to make a success in business anyway — or has a pretty weak proposition on offer.

On British retailers trying to conquer America
The dream of conquering America has seduced British retailers for decades. For most, the New World has proved a commercial graveyard . . . Competition America was built by capitalism, so only the most determined and efficient operators survive. In the main, shoppers have huge choice and demand much higher levels of service than are expected here.

On magazine publishing
I've never truly understood the economics of magazine publishing. Tony Elliot, the founder of Time Out, told me most US magazines took five years to reach profit and 10 years to earn their investment back – and that was the ones that worked! To me a return profile that drawn-out is the stuff of madness. I budget for a restaurant to pay back within three years or so: a reasonable time horizon. But who can predict what demand and tastes might be in five to 10 years?

On the digital threat to publishers
Publishers, stations and perhaps even platform owners will have to reinvent themselves as efficient aggregators and editors of superior content.
There is an infinite amount of rubbish out there in hyperspace. Quality will remain of paramount importance: low-budget home videos still can't compare as a viewing experience to movies produced by a Hollywood studio.
As ever, those operators who take intelligent creative risks will be rewarded - this is not the time for dull remakes, sequels and predictable standbys.

On bosses
Sadly this is an age of grey bosses and pygmy leaders. Too few have real flair or a sense of high drama about them. The characters have been replaced by committees. Many 21st century “leaders” are simply administrators or over-promoted bureaucrats.

On buyouts
The siren call to executives to run a buyout rather than a major public company is more seductive than ever. Why worry about media and analyst scrutiny, six-month results, and dancing to the institutions' tune, when you can run your own show with debt and private equity? And the rewards are far greater. Head hunters tell me that while a few years ago ambitious executives all wanted to be chief executive of a FTSE100 company, now they want to do a leveraged buy-out and get rich, without all the brickbats.

On W H Smith
I am sure that, when Henry Walton Smith founded the business in Mayfair in 1792, he used borrowings. Perhaps the inheritors of his enterprise should follow his lead now, and go and get some debt.