Chapters Realigns as Takeover Battle Continues
Leah Eichler -- 12/18/00
Book retailer in war of words with would-be owner, Trilogy

Approximately one week after receiving an unsolicited takeover bid from Trilogy Retail Enterprises (News, Dec. 4), Chapters Inc. announced a major restructuring that it said will make the company more profitable. Despite the timing of the realignment, Chapters's CEO Larry Stevenson insisted that the changes were not in response to Trilogy's offer.

Under the restructuring, Chapters Inc. will buy back its online and wholesale operations. Once completed, the company will leave the wholesale business and reduce its online operations in order to focus on its retail business. "By bringing Chapters Online and Pegasus Wholesale in-house [Chapters will then use Pegasus as its in-house warehouse operation], we will benefit from significant cost reductions, but more importantly, will be able to further build profitability into Chapters Inc.," said Stevenson.

Chapters currently owns 69% of Chapters Online and its board has approved the purchase of the remaining 31% for C$3.40 ($2.20) per share. Chapters will also buy out the 18% stake of Pegasus that it d s not own from minority shareholder Canadian General Capital Inc. in exchange for approximately C$7.5 million ($4.85 million) worth of securities issued by Chapters Inc.

While Chapters was unveiling its new operating structure, company executives were engaged in a war of words with Trilogy's principal owners Gerald Schwartz and his wife, Heather Reisman, who is also the founder of Indigo. After hearing about Chapters' restructuring plans, Schwartz issued a statement asserting, "Chapters has become virtually the only company in North America to offer cash to bail out the shareholders of a failing e-tailer. If that weren't odd enough, it is offering 170% of the market price of Chapters Online, which has declined to a recent C$2 per share from over C$25 per share last year." Schwartz further noted that, "this transaction uses up all of Chapters Online's cash reserves, requires a further $4 million investment by Chapters Inc., and exposes Chapters Inc. shareholders directly to the ongoing risks of Chapters' attempt to turn around this business."

Chapters expressed dismay at Trilogy's response to its buyback proposal, explaining, "These actions were necessary to maximize shareholder value, enhance cash flow and profitability at Chapters Inc." Chapters urged its shareholders to reject Trilogy's offer, explaining that their intentions demand shareholders to take a leap of faith that may be financially unsound.

"After reviewing Trilogy's circular, Chapters' management continues to recommend that shareholders reject the offer because it d s not provide adequate value to Chapters' shareholders," Stevenson said. "Given the numerous conditions attached to it, Trilogy's bid circular is not really an offer but an option to acquire while asking our shareholders for a lot of blind faith," he concluded.