Offer for Indigo ‘wholly inadequate’, says analyst

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Shares of Indigo Books & Music Inc. IDG-T traded up by more than 45 per cent at Friday’s close in the wake of a proposal from Onex founder and chairman Gerry Schwartz to take the company private, but one analyst is calling the bid “wholly inadequate.”

On Friday, David McFadgen of Cormark Securities Inc. recommended in a research note that Indigo shareholders should reject Mr. Schwartz’s offer of $2.25 in cash per share to acquire the remainder of Indigo stock that he does not already own.

Cormark’s Mr. McFadgen, who is regularly the only analyst to ask a question during Indigo’s quarterly earnings calls, has a “buy” recommendation on the stock. The current share price “attributes little to no value to the brand and the lease portfolio,” he wrote in Friday’s note, adding that Cormark believes Indigo is “capable of generating much higher EBITDA,” or earnings before interest, taxes, amortization and depreciation. Indigo reported an adjusted EBITDA loss of $13.8-million and a $22.4-million net loss in its second quarter ended Sept. 30. The company is scheduled to report third-quarter earnings next week.

“In our opinion, this offer is wholly inadequate, and it should be rejected,” Mr. McFadgen wrote.

Shares of Indigo Books & Music up more than 50% after privatization proposal

Mr. Schwartz sits on Indigo’s board and is the controlling shareholder, with 56 per cent of the outstanding shares held in his personal holding companies, Trilogy Retail Holdings Inc. and Trilogy Investments LP. But in order to be approved, a majority of the rest of the shareholders not affiliated with Trilogy will still have to vote in favour of the proposal.

Indigo founder and chief executive officer Heather Reisman, who is married to Mr. Schwartz, recently launched “a major transformation process” at the retailer, after a rough year in which the company was shaken by a cyberattack, mounting financial losses and multiple board and executive departures. Ms. Reisman returned as CEO last September. Together with Ms. Reisman’s own holding company, HRON Canadian Investments Ltd. and other “joint actors,” Trilogy controls roughly 60.6 per cent of Indigo’s shares.

In a statement on Thursday, Trilogy wrote that it would not support any other proposal and would not be prepared to sell its shares.

Indigo’s share price closed at $1.48 on Thursday afternoon before the announcement was made public. As of Friday close, the shares had risen to $2.16. Indigo’s shares have slid significantly on the Toronto Stock Exchange in recent years, falling from more than $10 five years ago.

Indigo’s controlling shareholder plans to take the company private

If the proposed transaction is approved, the shares would be delisted from the TSX, and Indigo would no longer be subject to public disclosure.

Mr. Schwartz did not respond to a request for comment on Friday

As it has continued to lose money, Mr. Schwartz recently provided Indigo with a $45-million credit facility to finance its “seasonal working capital and operational needs,” according to company filings.

The Toronto-based retailer, which is Canada’s largest bookstore chain, is working toward a turnaround as it faces fierce competition – both from the likes of e-commerce giant Amazon.com, but also from a multitude of other retailers who sell the type of general merchandise Indigo has increasingly offered.

In recent months, Ms. Reisman has said publicly that Indigo will continue to offer some non-book merchandise, such as sleepwear and other products, but that the retailer should restore a focus on reading in its stores. Ms. Reisman has set a goal for books to account for 65 per cent to 70 per cent of Indigo’s sales in the future, she told representatives from the Canadian publishing industry during an online question-and-answer session last October.

During that same session, Ms. Reisman also said that Indigo was not for sale, and that she and Mr. Schwartz were committed to the company remaining Canadian-owned.

“Not only do we have no intention of selling it, we intend to invest in the business,” Ms. Reisman said. “I can tell you I am committed; your two major shareholders are committed.”