After Heather, the deluge
After Heather, the deluge
Indigo effectively has a new owner and a new mission
This is the 197th edition of SHuSH, the official newsletter of The Sutherland House Inc. If you’re new here, hit the button:
Let’s recap the Indigo news so we’re all on the same page before I give you the essential background, some trenchant analysis, and a lot of irresponsible speculation.
Four members of the board of directors of Canada’s dominant bricks-and-mortar book retailer, Indigo Books and Music Inc., resigned this week. At the same time, founder Heather Reisman announced she would step down from her position as executive chair of the board.
Long-serving directors Frank Clegg, Howard Grosfield, and Anne Marie O’Donovan left without explanation. Recent appointee Dr. Chika Stacy Oriuwa resigned “because of her loss of confidence in board leadership and because of mistreatment,” according to the Indigo press release.
Reisman, who has led Indigo throughout its quarter-century existence, said her departure will take effect in August. The other four have already been scrubbed from the Indigo website.
“Deciding when it is time to move on is one of the toughest decisions a founder must make, but I know this is the right moment for me,” said Reisman in the release. “Building Indigo over the past 25 years has been the adventure of a lifetime. As I embark on this new chapter, I will be rooting for the company every step of the way.”
Apart from a spokesperson insisting that Indigo remains confident in its business, its finances, and its long-term strategy, c’est tout.
BACKGROUND
Indigo opened its first bookstore in Burlington in 1997 and quickly expanded across the country in competition with the Chapters chain, which it bought in 2001. Heather’s husband, Gerry Schwartz, provided much of the financing in these years. Gerry is the controlling shareholder of Onex, a private equity firm that now has about $50 billion in assets under management.
Influential in Ottawa, the Schwartz-Reismans managed to convince the federal government to approve Indigo’s purchase of Chapters and also keep the US book chain Borders from moving north into Canada—a double play that cleared the field of meaningful competition and wouldn’t have happened in a country with serious antitrust enforcement.
Heather, as Indigo CEO, cast herself as the queen of Canadian literature, making personal selections of books to her customers, hosting book launches, interviewing celebrity authors, etc.
From a financial perspective, Indigo took about five years to get rolling after the Chapters acquisition. It looked steady through the late aughts and into the teens when Amazon showed up in force. Indigo’s share price caved. Unable to convince Ottawa to push Amazon back across the border, Heather adopted a new strategy, backing out of books and recasting Indigo as a general merchandiser selling cheeseboards, candles, blankets, and a lot of other crap to thirtyish women. “We built a wonderful connection with our customers in the book business,” she famously said. “Then, organically, certain products became less relevant and others were opportunities.” This charmed investors, if not the book community, and Indigo’s share price hit a high of $20 a share in 2018. By then, books, as a share of revenue, had fallen from 80 percent of revenue to below 60 percent (they are now 46 percent).
The more recent four or five years at Indigo have been a disastrophe. With its eighty-eight superstores and eighty-five small-format stores, the company lost $37 million in 2019, $185 million in 2020, and $57 million in 2021. Things looked somewhat better in 2022 with a $3 million profit, but its first three quarters of 2023 (Indigo has a March 28 year-end) resulted in an $8 million loss and its fourth quarter featured one of the most spectacular cyberhacks in Canadian commercial history. The company’s website was breached and its employment records held for ransom, resulting in a ten-day blackout for all of the company’s payment systems and a month-long outage in online sales. The share price is now $2.00 or one tenth the 2018 high.
ANALYSIS AND IRRESPONSIBLE SPECULATION
Given everything Indigo has been through over the last several years, and especially the last several months, it’s not surprising that Heather wants to pack it in. She’s seventy-four and super wealthy. There’s nothing but a desperately hard slog ahead for her money-losing company. Why stay?
Still, this has the feel of something that blew up at a board meeting, or in advance of a board meeting. It’s highly irregular for a company to lose almost half its directors in a single day. If these changes had been approached in conventional fashion, there would have been more in the way of messaging and positioning, especially regarding Heather. For all intents and purposes, she is Indigo. It wouldn’t exist without her. They ought to be throwing her a retirement parade and presenting her with a golden cheeseboard. Instead, all she’s getting, for now, are a few cliches in a terse press release.
It’s also weird that this all happened days before we get the company’s year-end results (they were out by this time last year). My guess is that the board got a preview, that the picture is ugly, that there are big changes afoot, and that the directors were nudged out as the start of a major retrenchment or given the option of sticking around for a bloodbath and chose instead to exit.
I lean toward the nudge. How else do we explain a press release that includes Dr. Chika Stacy Oriuwa’s claim that she’s been mistreated (apparently the mistreatment had something to do with board committee assignments)? A company has no interest in making such a comment. It feels like something that was negotiated, perhaps in return for a resignation and along with a buyout of the shares directors receive in compensation and a non-disclose agreement. But that’s irresponsible speculation.
Here’s analysis. It’s Gerry’s company now. He owns 58 percent of the voting shares in Indigo (Heather has 5 percent). He also owns what remains of the board of directors.
Indigo’s eleven-member board is now seven. Three of the remaining directors are family: Gerry, Heather, and their daughter, Andrea Reisman Johnson. The fourth and lead director is Robert Haft, Gerry’s old buddy from Harvard Business School. The fifth is Mitchell Goldhar, another Gerry buddy who also sits on the Onex board. The sixth is Jonathan Deitcher, a third Gerry buddy whose name is over the door of the Jonathan Deitcher Financial Trading Room at the Gerald Schwartz School of Business at St. Francis Xavier University.
The seventh director is CEO Peter Ruis, a career fashion retailer who landed in this jackpot from England two years ago. He is polishing his resume as we speak or negotiating a massive retention bonus to stick around and wield an axe on Gerry’s behalf. My money is on polishing.
I asked Google if Gerry had relationships with the four retiring directors. It came up empty. No doubt, then, Gerry’s on a mission and wants only his most loyal and battle-hardened troops alongside him.
What will Gerry do with Heather’s company?
Rather than guess, I talked things through with my buddy Dave McFadgen, who some of you will remember for his star turn in SHuSH 152, “Indigo’s Quarterly Kabuki.” If you’ve not had the pleasure, meet Dave:
Apart from being an avid fisherman, Dave is the only Bay Street analyst who has bothered to dial into Indigo’s quarterly earnings calls for the last few years. If any outsider can claim to be an Indigo expert, it’s him.
Dave was surprised by the resignations and agrees that they herald a new era at Indigo. He thinks Gerry, as lead shareholder, is calling the shots and that there will be blood in the aisles in no time. Gerry doesn’t want to be a bookseller or a general merchandiser, says Dave. That was Heather’s schtick. Gerry will want out from under Indigo and, being a shrewd financial manager, he’ll want to stem the losses, goose the profits, and drive the share price as high as $10 before flipping the company to another private equity firm, thus recouping some of the money he’s invested in Indigo over the years.
This fits with everything we know about Gerry. As one of his partners at Onex once told me with awe in his voice: “Gerry is greedy. Very greedy.”
Interestingly, Dave doesn’t think turning Indigo around will be particularly difficult work. He estimates Gerry could carve $25 million out of Indigo’s SGA&O tomorrow, which is a fancy way of saying the company has a bloated head office. The individual stores are profitable and the leases are valuable. Fire all the centralized managers and administrators and accountants and the financial picture suddenly looks a lot brighter. Maybe cut expenses and under-performing inventory at the stores and it looks brighter still.
Of course, Dave looks at this strictly from a financial perspective. He doesn’t give a shit how it hits authors and book publishers and he thinks it’s a good thing that books are 46 percent of Indigo revenues and falling. The crap (in photos above and below) is more profitable and Dave doesn’t shop at Indigo, anyway. His wife shops there but she buys gifts, not literature. As far as he’s concerned, people can get their books from Amazon.
That’s relevant because Gerry, too, is a financial guy, and if Dave thinks Indigo needs less exposure to books, it’s likely Gerry will, too.
Once the stables are clean, Dave expects Gerry to seek a foreign buyer for Indigo. He would find it unappealing to sell to a Canadian private equity firm, which by definition would be a competitor to Onex. And it’s likely the chain is more valuable to a retailer looking to get into Canada than one already here.
What kind of retailer? Dave doubts that Gerry will be focussed on finding a bookseller to purchase Indigo. He’ll be selling to the highest bidder, likely a general retailer because there are more of them. I asked him if he thought James Daunt, the frontman for Elliott Management, the private equity firm that owns Barnes & Noble and most of the UK’s book chains, might be tempted to enter the Canadian market.
“Who?” asked Dave.
Someone else I know asked a higher-up at Elliott Management in March if he’d be interested in acquiring Indigo. “Not a good idea,” was the response.
Dave predicts Gerry’s Indigo divestment will happen fast. He’ll be shocked if the chain isn’t in the hands of a new private equity owner two years from now.
It all makes sense. The Schwartz-Reisman’s have had enough. Heather doesn’t want to be the one demolishing everything she’s devoted herself to over the last twenty-five years, so she steps aside, the board strips down and girds for battle, and the nasty work of preparing Indigo for sale begins.
A few points.
Technically, Canada’s foreign ownership rules prohibit foreigners from owning our bookstores because they are valuable cultural institutions. Don’t expect Ottawa to lift a finger if Gerry finds a foreign buyer. Foreigners aren’t supposed to own our newspapers, either, but the vast majority of them have fallen into the hands of American bondholders over the last decade or so.
This is an ignominious exit for Heather Reisman. She bid to make herself a big player on the Canadian cultural scene by selling all the books. Twenty-five years later, she’s swallowed the Chapters chain, put many independent booksellers out of business, backed Indigo out of books, and left us at the brink of becoming a bookselling wasteland. The costs of her “adventure of a lifetime” will fall on others for years to come.
It’s unlikely that a new Indigo owner would immediately exit bookselling given that books are still almost half the business, but if Dave is right and the new owner is a private equity firm, a certain logic comes into play. The new owner will be highly leveraged and under pressure to make Indigo even more profitable than Gerry is able to make it—and Gerry will have personally squeezed every nickel. If crap is more profitable than books, the de-booking of Indigo will accelerate.
Heather aside, this is a massive policy failure on Ottawa’s part. It allowed Indigo to gain control of a ridiculously large share of the retail book market. It locked the Borders chain out of Canada when readers, authors, and publishers here could have used some competition in the bookselling sector. It then let Amazon waltz in and pick up 50 percent market share, which convinced Heather she’d be better off selling socks and coffee mugs. And here we are.
There’s a lot at stake for authors, agents, publishers, and everyone else in the book business. It’s not causation, but neither is it coincidence that the independent publishing sector has seen its revenues decline from $60 million to $40 million in the same decade that Indigo has let books shrink from 78 to 46 percent of its business. The chain still accounts for somewhere in the neighbourhood of 20 to 25 percent of books sold in Canada and some mid-size and multinational publishers register 40 to 50 percent of their sales at Indigo. If things roll out as Dave suspects, the blood will flow far beyond Indigo.
Again, this is a mix of fact, analysis, and irresponsible speculation. We’ll see soon enough.
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