Chapters Bid

Chapters Bid

Inside the Toronto mansion of Heather Reisman and Gerry Schwartz, venue of glittering parties featuring Canada's cultural and political elite, the library is one of the most popular rooms. In among the shelves of literature, art books and countless tomes by Winston Churchill and about John F. Kennedy is a swinging bookcase - and behind it is the hidden home office of Schwartz, where the desk of the takeover artist and Onex Corp. CEO overlooks his wife's rose garden. For Reisman, 52-year-old founder and CEO of Indigo! Books & Music Inc., the library holds special significance. She likes to tell the story of how she and Gerry, 59, put everything else together - their households, their bank accounts, their lives - to make sure it all worked, before they merged their cherished book collections.

Last week, the dynamic business couple proposed a marriage of a different sort: merging 15-superstore Indigo with Canada's dominant book retailer, Chapters Inc. The timing of the move, rumoured for months, still took the publishing and business world by surprise. Was it, as some suggested, a case of multimillionaire Schwartz bailing his wife out of her troubles at Indigo? Or was it a shrewd and calculated coup to finish off Reisman's ongoing feud with Larry Stevenson, who five years earlier had merged Coles and SmithBooks into Chapters, and built 77 superstores across the country, forever changing the way Canadians buy books? Whatever the case, Stevenson is a reluctant potential groom. But in the end, say analysts, he might not have a choice.

The pitch became public the morning after the federal election returned Jean Chrétien's Liberal party, which Reisman and Schwartz prominently support. In a conference call to analysts, Schwartz said he and his wife, who own 48 per cent of Indigo, were offering, through their partnership Trilogy Retail Enterprises LP, $13 a share - $63.5 million - to raise their existing 9.5-per-cent stake in Chapters to 50.1 per cent. (Chapters had closed at $9.10 the day before.) Schwartz said they would merge the companies, and their Internet sales operations, to deal with "overcapacity" and "lacklustre profits." He would not reveal Indigo's financial picture, but he said it had "higher sales per square foot than Chapters." He estimated that Chapters controls 27 per cent of the market, Indigo three per cent - although others, and perhaps the federal competition bureau, see that as low.

Meanwhile, on election night, Reisman commenced a subtle public relations campaign. She called John Neale, the publishing heavyweight who oversees the Canadian operations for Random House and Doubleday and the marketing for McClelland & Stewart, and arranged to meet him the following day. That morning, she announced her plan in letters faxed to each publisher, and followed them up with phone calls. She told the publishers she loves books, that this was her baby and she was in it for the long haul. She would close excess stores and she would get rid of Pegasus Wholesale Inc., the Chapters-created book distributor that irritated publishers by demanding deep discounts.

For Stevenson, who is forever labelled as a former paratrooper despite his Harvard MBA and business background, war had been declared. He cancelled scheduled meetings by saying, "something has come up," and a planned board meeting grew in significance. The board, which includes former Ontario premier David Peterson as chairman, declared the bid to be "totally inadequate and unacceptable," and a fraction of the company's true value. Coming before the lucrative holiday season could improve Chapters' bottom line, the timing of the offer, added Stevenson, was "opportunistic."

To plead his case, Stevenson sat down for an interview in one of the leather chairs that dot a north Toronto store located a block away from Indigo. That day, the store had won an award for design from Chain Store, the leading periodical in the business. Although he enjoyed the designation, Stevenson says too much has been made of the look of the competing outlets: Indigo deemed to have a softer feel and more female-friendly displays, Chapters regarded as more mannish. Stevenson says Chapters designs its stores for families, and he wants people to walk away thinking, "Wow, did they have a lot of books." To critics who say his superstores killed local bookshops, he points to letters from parents who say how much they enjoyed bringing their children.

Canada now has about 100 superstores, including independents, and Stevenson feels there is room for up to 125. "In 1994, I thought it could support 150, but I did not envisage the electronic downloading of books, and electronic buying over the Internet." He does not agree with suggestions that up to 20 stores in the combined operation could be closed. "The core of Toronto and Calgary are overbuilt," he says, turning the blame on Indigo, "because someone went across the street from where we were."

Analysts contend that Canada is better suited to 70 or 80 superstores, and criticize Chapters for expanding too quickly. David Schroeder, a retail analyst with Dominion Bond Rating Service, says Chapters has been on an "extreme spending spree," dishing out capital at double the rate of its cash flow. To make matters worse, its subsidiaries have had an even tougher time. Chapters Online Inc., owned 69.9 per cent by Chapters, lost $37 million last year, and $19 million in the first six months of 2000. And Pegasus, which supplies both the online and retail Chapters, lost $9.5 million in the year ending April 1. To exacerbate the problem, if Chapters Online and Pegasus were to be closed, Chapters Retail, the only Chapters business generating a positive cash flow, would be forced to take on the others' debt, estimated at $134 million.

Analysts caution it is tough to evaluate Indigo's proposition because the private company's finances are not known. That argument was echoed by Stevenson, who says he doubts Indigo outsells Chapters per square foot. Reisman reportedly told an analyst that Indigo was losing money, but she and Schwartz declined media interviews last week. Friends, however, said Schwartz was "livid" over the suggestion he had to bail out his wife, an accomplished businesswoman.

Publishers also declined to comment publicly, not wanting to irritate whoever wins the struggle. Many in the industry are quietly cheering for Reisman, whose love of books, they feel, can be backed up by deeper pockets. Bruce Westwood, who runs the largest agency for authors in Canada, hopes a rationalization takes place to make one of the players stronger. But competitors like Richard Bachmann of A Different Drummer bookstore in Burlington, Ont. - where both Chapters and Indigo launched their first superstores in 1995 and 1997 respectively - feel the public has little to applaud. "This is not about culture or literature," says Bachmann. "It's about money." Not to mention control. Last week, Chapters held a 40-per-cent-off best-sellers sale. That kind of event, many predict, may disappear when one mega-company dominates the market.

Maclean's December 11, 2000