Borders Bookstores in Australia was either not big enough or small enough to be a viable player in an evolving market. When private equity wants to sell be suspicious. Big landlords need to better interpret and project big tenant performance.

The commentary following the fall of Borders, Angus and Robertson and Whitcoulls franchises offers lessons and raises questions.

REDgroup, a business that controls a portfolio of retail operations in Australia and New Zealand, is controlled by private equity firm PEP and has had a troubled few years during which it has breached a number of lending covenants with its banks.  Borders Busted

The collapse of Borders has been big news in Australia professing a myriad of reasons for the not so over-night failure.

It’s a very good example of why bookselling is not a corporate business – it’s a hands-on, detail-intensive business with low profit margins. Only people who love it and know what they’re doing can make a success of it – internet or no internet. SmartCompany

Business onlookers are beginning to see an ugly trend in corporate and franchise system collapses especially where private equity investors are involved. However, the ASIC regulator has not seemed to have noticed.

Private equity firm Pacific Equity Partners bought the Borders and Angus & Robertson businesses for $225 million in separate transactions in 2004 and 2008. It’s easy to say the valuations look too high with hindsight but it is questionable whether PEP was looking 10 years into the future when it made those acquisitions.   10 lessons from the collapse of Borders

While many are questioning the future of bookstores others are questioning systemic PE stripping and the future of dubious administrations particularly as they apply to the attractive franchise sector.

Talk back radio suggests the private equity get out ability tends to leave PE managers unscathed but the entire process drains everyone else and the economy and distorts the concept of ‘free markets’ when business goes bad.

Bookseller Borders, which helped pioneer superstores that put countless mom-and-pop bookshops out of business, filed for bankruptcy protection Wednesday, sunk by crushing debt and sluggishness in adapting to a rapidly changing industry.  Borders Bankruptcy

For many there is a question of REDgroup timing. At what stage did the private equity manager decide on crushing debt that would be left behind under administration? Many suggest Borders was dead man walking in 2007 when the talk CD and DVD retailing.

This afternoon Ferrier Hodgson partners were appointed voluntary administrators of REDgroup Retail Pty Ltd. Corporate undertakers

Ferrier Hodgson was the administrator for Midas Australia in 2008 and given that questionable performance alone, many insiders are not expecting any transparency or answers regarding allegations serious debt was built in to be left behind.   

The administrators say it will be business as usual while the business's financial status is assessed ahead of the first creditors meeting, which is expected to be held in March. The REDgroup board is believed to be confident that the company can be restructured.  ABC

Voluntary administration appears to be a useful step in debt and contract removal that produces a revised and suddenly saleable product.

Changing markets call for changing business models and perhaps when PE collapses occur the regulator might want to have a closer look.  

One thing is certain; franchising will remain very attractive for private equity investment managers who have no real skin in the game and where strategic exits can be extremely lucrative.