Giant booksellers battle on Wall St: As US investors are asked to fund bookshop growth, Larry Black reports on a blockbuster of a business

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The Independent Online
THE BATTLE of America's bookstores, which has moved from shopping malls to huge discount superstores, is about to arrive on Wall Street.

Barnes & Noble, the second-largest bookseller in the United States, plans to sell a third of its shares to the public in coming weeks, asking investors to fund an expansion that will double the number of superstores it operates by next January. The flotation, worth dollars 100m (pounds 53m) at an estimated dollars 15 a share, will be followed by a public offering of dollars 170m in new debt, leaving the chain very highly geared.

Best known for its huge building on lower Fifth Avenue in Manhattan, which bills itself as the world's biggest bookstore, Barnes & Noble has led the drive towards giant stores, with 68 spread across the US. Some stores feature espresso bars and local literary events. They average 15,000 sq ft and carry 100,000 titles, 10 times the inventory of a typical shopping-centre store.

Leonard Riggio, the chain's chairman since he acquired the Fifth Avenue store in 1971, is a pioneer in mass discounting of books. Aggressive expansion, however, has resulted in losses in three of the past five years. Sales rose last year to dollars 920m from dollars 880m, but Barnes & Noble made a dollars 371,000 loss in 1991. In the quarter ended in May, the loss soared to dollars 9.4m. The firm attributes the loss to the up-front costs of opening so many new stores, and believes increased sales will compensate at the end of the year. The chain, now owned 50-50 by Mr Riggio and the Dutch retailer Vendex International NV, notes that turnover increased 4.2 per cent at its superstores last year while it fell 2.5 per cent at its 770 mall stores.

Some analysts doubt whether investors will be attracted to a low-margin business that is fast becoming an arena of stiff competition. The industry leader, Waldenbooks, owned by the giant KMart retail chain, says it will open 40 superstores a year, and last week Borders, a small but fast-growing chain of over-sized bookstores, announced its own plan to go public.

Both Barnes & Noble and Borders, hoping to cash in on high stock prices and low interest rates, are pricing their shares aggressively. The only 'pure' bookstore chain on US stock markets commands a price of 10 times earnings; Borders' initial offering implies a multiple of more than 40.

Given the problems some other public offerings have encountered in recent months, there are some doubts whether even Barnes & Noble, widely regarded as the best-run chain in the industry, can generate sufficient reader interest in the issue. The alternative is the Wall Street equivalent of remaindering.

A less ambitious price might make the sale feasible, but sticking to plans for another 65 superstores would require more borrowing. Even if its issue proves a best-seller, Barnes & Noble estimates its ratio of debt to shareholders' equity at about 0.85 to 1.