News broke on Nov. 8 that Indigo Books and Music’s e-reading spin-out, the Toronto-based Kobo, was being purchased by Japanese e-commerce giant Rakuten for US$315 million. Indigo CEO Heather Reisman—whose company had retained 44% ownership of Kobo—called the deal a “win-win-win” situation for all companies involved. With the deal, Indigo has cashed out on an investment that was expected to provide a buffer against the decline of its traditional book-selling business. But if Indigo saw the Kobo as insurance against future decline, why would it sell now? This morning, Reisman and Kobo CEO Michael Serbinis spoke with Canadian Business staff writer Jordan Timm.
Canadian Business: Heather, you said on the conference call last night that at the time Rakuten first approached you earlier this summer, Kobo wasn’t for sale. When did that change, and why?
Heather Reisman: We knew that with how this industry is evolving, we might at some point feel that we wanted to partner or that we would be a good candidate for somebody to purchase. We were not yet at that stage when Rakuten approached us, but they were clearly really interested in getting into this space and provided what we thought was an important global platform for Kobo. Then the question was, are they going to pay a big enough price to give us the kind of return that we thought was appropriate? So when we were able to get together on a price, then we said yes, let’s go ahead and do this deal. We effectively get a stupendous return on our investment, and I don’t know anything that could be better than that—given that we understand that this is a hugely global play, and participants are up against people whose balance sheets are $50, $60 billion of capital. So there comes a time when you say, we’ve done an amazing job, we’ve grown it to be something that’s truly spectacular, and now it’s time for it to take the next step.
CB: The first question the deal raised was, if you’ve got a controlling interest of a growing, disruptive company like Kobo, why do you let that go? And you’re saying that it’s because of the capital requirements of the industry.
HR: It’s very clear. We were able to get to this stage on a level of capital where we could be major participants. We were the founders of it, and were able to leverage our investment up in order to bring in more capital and still maintain a controlling position. Over the next year, this business will need in excess of $100 million to take it to where this industry is going, and we just cannot play in that league for that amount of capital. That’s first, but it’s also a question of speed. How quickly can you grow this business in order to establish your leadership position? What Rakuten brings is tremendous reach with their huge customer network. But you have to understand the character of the industry, and what it requires to get to the next stage. And for me personally, having ushered this, it’s a bit bittersweet—but it is absolutely 100% the right thing to do, for Kobo, for Indigo, and I’m sure that Rakuten will have a massive success with Mike and the team.
CB: You were in a strong cash position before, and you’ve added $140 million to your balance sheet. What does that mean for Indigo?
HR: We must and will fundamentally transform Indigo. The idea of a book retailer as it existed up until the last two years—that option no longer exists. We did two things two years ago: we made the decision to commit to Kobo, and we also made the decision to fully transform Indigo into a whole new kind of retailer and e-tailer, and we are on that track right now. And there’s no doubt that some of that money will be used in that transformation process, both digitally and physically. We caught the wave on e-reading and had a tremendous success with Kobo. I see Indigo as that kind of innovative platform, and we’ll do it again.
CB: Do you guys go shopping with this? Is there potential for you now to transform Indigo’s business in part through acquisition?
HR: Uh, very possible. Very possible. But we will be, as we have always been, very prudent with our capital. For years people would say, what are you going to do with that money on your balance sheet? I said, “Well, when we find the right thing, we’ll do something.” And we invested in Kobo, and got a great return. And we have every intention of being as prudent, and hopefully as successful.
CB: Mike, what’s the biggest advantage for Kobo now under Rakuten’s ownership?
Michael Serbinis: It’s really about accelerating our growth. With any other start-up, going from zero to a couple hundred million in sales in your first two years would be nothing short of a miracle—but here it’s about getting to a billion, very fast. We’re dealing with Amazon, Apple, and if that weren’t enough, Google is interested in [the e-reading market]. So growing faster internationally, innovating more broadly, these are going to be the biggest things that we can do with Rakuten behind us. We’ve always been competing with goliaths, and now we’ve got a goliath backstopping us.
CB: Heather says it’s going to take $100 million next year to keep Kobo competitive. Do you think that’s a fair number?
MS: You know the thing that’s been constant from the beginning is that the capital requirements in this market continue to grow. And I think the reason for that is that the transition to digital just continues to move faster than anyone expected. Certainly the capital needs in the next couple of years, without revealing too much about strategy, is in the hundreds of millions. And whether a hundred gets you to 6 months or 12, we’ll see—but it’s certainly in the hundreds of millions.
CB: And Rakuten’s obviously willing to invest those huge sums in this venture.
MS: Absolutely. They built a tremendous business as an e-commerce player in Japan, the largest economy outside of the U.S., and they have been expanding globally. They see how important digital content is to the future of e-commerce for them.
CB: I’m sure that you’ve known for a while that there was only so far Kobo could go under the current ownership structure, but are you surprised the sale came this early?
MS: Part of my job is looking at how we get to the next level, and you’re always looking at options, whether it’s raising money or going public—both of which are not exactly easy things in the current market. But you’re also looking at strategic partners. And the conclusion from my standpoint some time ago was that money alone was not going to get us where we needed to get to. We’d been talking to other strategic partners, and [Rakuten] were just a natural fit, the number one e-commerce player in Japan with over 50 million customers already.
CB: So how are you feeling?
MS: I feel great. It’s been not even 23 months since we started the company. And in that time, all I’ve heard was, “How are you gonna win? How are you gonna beat these guys? It’s impossible! You’re screwed!” And I think this deal’s a pretty big validation of what we’ve built, and I think our best days are in front of us. Ninety billion dollars of books are going digital, and we’re in the first inning of that. So with Rakuten at our side and at our back, I see Kobo becoming a multi-billion dollar company.