Indigo sells off Kobo e-reader business
Kobo Inc. says its e-reader customer base grew by 2.5 million in the first quarter.
Published Tuesday, November 8, 2011 7:35PM EST
TORONTO - The e-reader company founded by Indigo Books & Music Inc. will be sold to a Japanese e-commerce company for US$315 million.
Canada's biggest book retailer said that Tokyo-based Rakuten Inc. will buy all of Kobo Inc., an announcement that came just minutes before the retailer reported a second-quarter loss of $40 million.
Indigo (TSX: IDG) owns 51 per cent of Kobo and expects to receive between US$140 million to US$150 million from the sale.
The company did not say why it decided to sell its Kobo unit, which has been a rapidly growing part of its overall retail business. However, the global market for ebooks is intensely competitive and it takes some financial muscle to invest in its continued growth.
Indigo founded Kobo and spun it off in 2009 to compete in the global ebook sector against industry leader Amazon 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. However, ebook sales are also quickly eating into profits of traditional bookstores like Indigo and its Chapters division.
Other investors in Kobo include Australian book and music chain RedGroup Retail and Cheung Kong Holdings, an investment company controlled by Hong Kong billionaire Li Ka-shing.
Bankrupt U.S. bookstore chain Borders had owned 11 per cent of Kobo when it began liquidating assets in July.
In April, Kobo Inc. closed a $50-million financing aimed at helping the company fund its international expansion.
Indigo said both it and Kobo believe that Rakuten is the right partner for Kobo to continue to grow because of its e-commerce strength.
"We are truly proud of the success that Kobo and Indigo have achieved," said Heather Reisman, CEO of Indigo and chair of Kobo.
"Notwithstanding the sale, Indigo will maintain a very strong relationship with Kobo, supporting the products and the services both in store and online and directly benefiting from the growth of the Canadian e-reading market."
Kobo will continue to function as a stand-alone business, with headquarters in Toronto.
"Kobo will continue its aggressive growth trajectory with Rakuten's support," said Michael Serbinis, CEO of Kobo.
"We look forward to continuing to innovate, provide the best eReading experience for customers, and expand internationally to solidify Kobo's leadership position in the global eReading market."
The deal is subject to approval under the Investment Canada Act and is expected to close in early 2012.
Kobo has more than 5.6 million readers in over 100 countries.
Just as Kobo grows, Indigo is being hit by consumers' transition from physical books to digital books.
News of the sale came as Indigo announced it lost $40.4 million, or $1.39 per share, during its fiscal 2012 second-quarter ended Oct. 1. That widened a $4.6 million, or seven cents per share, loss during the quarter a year ago.
A 219 per cent increase in sales from the Kobo division was one of the few bright spots during the quarter.
That jump as well as improvement in gift, lifestyle and toy sales helped drive overall revenue up by 1.7 per cent to $218.5 million.
However, on a comparable store basis, 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.
Online sales were up 1.1 per cent.
The company recorded a one-time goodwill impairment charge of $25.4 million for the period as a result of a decrease in its share price and earnings.
"The results were expected as we continued to invest heavily in our rapidly growing global digital business and our transformation strategy to become the world's first cultural department store," Reisman said.
Indigo operates under several banners including Indigo, Chapters and the World's Biggest Bookstore as well as Coles, IndigoSpirit, SmithBooks and The Book Company.
Shares in the company closed about five per cent, or 30 cents higher Tuesday at $6.73.