The massive (in price and implications) news that Ratuken is acquiring Kobo (http://blog.kobobooks.com/rakuten-to-acquire-kobo/) left me a little dumbfounded to understand the deal. (Disclaimer: I was contracted by Indigo to build the iOS ebook reader prior to the Kobo spinoff)

One the price, $315M means about a 6x return for investors of the last round just a handful of months ago. Yes the industry is growing faster than even those that created it expected, but it’s still a business struggling to turn profits. So why sell? Well the price is huge and present value is likely far less. An offer you couldn’t refuse, if you will.

What I got stuck on is how that was a good deal for Indigo? It owns 51.4% of Kobo and at the time of the announcement its take from the deal would have been about its market cap at close that day. But why sell the chicken before it starts laying eggs that is supposed to replace the now terminal cash cow (pbooks)? Indigo doesn’t need the cash (LT debt/equity is a paltry 0.76). Sure there will be a close relationship with Kobo under the new ownership, but there is no way it could be more profitable.

My theory it is part of a bigger plan that is going to see Indigo also exit. “But wait!” you say, “who in Canada would buy it?” That’s where it gets interesting. The Harper Government(tm) acting as the Canadian goverment is in the process of writing many laws, including copyright (Bill C 32) that currently limits foreign companies into the retail book market. With that changed, enter Amazon et.al. up into Canadian markets in a big way. Indigo is well managed, Heather knows what’s coming so why not cash out when the opportunity is there instead of suffering a slow decline?

After the Kobo announcement Indigo’s stock spiked upto 50% at one point, but has since settled to about book value. What premium do you think it will fetch?