TORONTO - The head of Indigo, Canada's biggest book retailer, says selling its stake in the Kobo ereader to a Japanese electronic commerce company will put enough financial kick behind the device to help it compete with the tablets of major competitors Apple and Amazon.
Heather Reisman, CEO of Indigo Books & Music Inc. (TSX:IDG), said Wednesday that Tokyo-based Rakuten Inc. is an ideal acquirer of the Kobo business. The Japanese firm has the ability to invest the $100 million to $150 million that's needed over the next year to advance Kobo's technology and grow its customer base, she said.
"We reached a point where we felt that the best thing for Kobo and Indigo ... (was) to make sure they're positioned for the biggest possible success," Reisman said in a phone interview.
"One big part of my decision to go ahead with the sale at this moment was because I believed firmly that the best future for Kobo would be with a partner of the scale of Rakuten."
Indigo announced Tuesday that Rakuten was buying up the Kobo assets, of which it holds a 51-per cent ownership stake alongside other investors, for about US$315 million.
The transaction comes as more readers turn to digital books instead of traditional hardcovers and paperbacks, which has put a pinch on many retailers, including Indigo. U.S. bookstore chain Borders, which owned 11 per cent of Kobo, went bankrupt earlier this year as its sales dwindled.
Indigo has worked to avoid such a drastic downturn in its sales by refocusing its operations to include toys, gifts and other household decor items.
On Tuesday, the company reported a loss of $40.4 million in the second quarter as Indigo and Chapters stores posted a 4.3 per cent decrease in revenue, while sales at its smaller format stores were down 2.9 per cent.
Sales in the Kobo division were up 219 per cent, marking one of the few bright spots in the quarter.
Kobo has been a rapidly growing part of Indigo's overall retail business. As part of the sale, Indigo has secured an agreement with Rakuten to receive an unspecified chunk of the revenue from the sale of ebooks through its operations, though Reisman says it's a "meaningful percentage."
The global market for ebooks is intensely competitive and it takes some financial muscle to invest in its continued growth. Kobo secured $50 million in financing earlier this year which was intended to fund its international expansion, though Rakuten's investment will be even greater.
"They also bring a huge customer base that will quickly be able to engage with Kobo and see how great Kobo is as an option," Reisman said.
Indigo founded Kobo and spun the company off in 2009 to compete in the global ebook sector against industry leader Amazon, as well as Apple and a multitude of other companies with devices, software or services. Kobo has been quickly catching up to Amazon's Kindle with its own reader and distribution system.
"With Rakutan we not only get the financial resources to continue to do what we're doing, but we can get there much faster," said Kobo CEO Michael Serbinis.
Indigo expects to receive between US$140 million and $150 million from the sale of its stake, which Reisman says will largely go towards investing in Indigo's existing businesses and new areas of growth.
Indigo anticipates that physical books will eventually become 50 per cent of its mix as the company adds additional lifestyle and gift products and turns to digital sales, Reisman said.
Octagon Securities analyst Bob Gibson gave his stamp of approval to the Indigo transaction.
"They definitely got a good price for it," he said in an interview. "In this market, that's great."
Gibson said he's not concerned that the growing number of U.S. retailers entering the Canadian market, like Target, will steal away a significant portion of Indigo's gifts business.
"It's a completely different category. It's more high end stuff," he said.
Indigo, which has 6,500 employees, operates 97 superstores under Chapters, Indigo and World's Biggest Bookstore banners, and also owns 147 small format stores, branded under Coles, Indigo, Indigospirit, SmithBooks, The Book Company, and Pistachio.
Kobo's other investors include Australian book and music chain RedGroup Retail and Cheung Kong Holdings, an investment company controlled by Hong Kong billionaire Li Ka-shing.
