Why Is Bill Ackman Siding with Borders Group?

Includes: BGPIQ, BKS
by: Eric Kuang

GuruFocus data shows that Bill Ackman’s Pershing Square Capital Management LP sold its entire stake of 6.5 million shares in Barnes & Noble Inc. (NYSE:BKS).

In a U.S. securities filing, Pershing Square said it no longer held any shares in New York-based Barnes & Noble as of Dec. 22. The hedge-fund company was the retailer’s third-biggest investor with an 11.8 percent stake as of Sept. 30. At that time, the holding represented 4.5% of Pershing Square’s total asset. Another GuruFocus Guru, Jean-Marie Eveillard also owns Barnes & Noble (7.3 million shares, or 13.36% of the company).

Barnes & Noble is the world’s largest bookseller. On January 8, it reported that due to the diminishing traffic, sales were down 5.4% from a year ago to $1.1 billion the nine week holiday period from November 2, 2008 to January 3, 2009. On the other hand, the company expected it will make this year’s earning forecast of $1.3 to $1.6 per share. The full yearly result will be reported on March 19, 2009. The company has approximately $275 million of cash on hand and no debt, that is compared to a market value of about $1.05 billion.

The stock price of Barnes & Noble took a dive during the past year. It is down 41% from a year ago. However, compared to the stock performance of its rival, Borders Group Inc. (BGP), which went down 92% during the past year, Barnes & Noble is holding up very well.

We should point out that Bill Ackman is also a major investor in Borders Group Inc.. GuruFocus data shows that Bill Ackman holds 25.3 million shares of Borders stocks, or 41.75% of the company as of October1, 2008. Bill Ackman more than doubled his position on October 1, 2008 alone from one day earlier. The bet did not seem to favor the Guru behind the move, Borders stock has declined from about $6.6 a share to about $0.74 since then, losing nearly 90%.

Borders Group reported negative earning for the past two years, -$2.55 and -$2.68 per share respectively for 2007 and 2008. It is expected to report another negative year for the year that is ending on January 2009.

Bill Ackman tends to hold a very concentrated portfolio. GuruFocus shows, as of September 30, 2008, it only reported to be holding 14 stocks, among them, Barnes & Noble and its rival Borders Group Inc. The decline of these two stocks contributed to a 12 percent decline in Ackman’s largest hedge fund last year. Obviously the active money manager also has or had holdings other than common stocks, including the much-debated CDS’s against Ambac and MBIA.

By selling out Barnes & Noble and adding to Borders, Bill Ackman seems to be taking side in the battle of two rivals. Given the relative strength of the former in business, balance sheet, and stock performance, one has to wonder why.