Proposal to take Indigo private would lower scrutiny, boost flexibility: experts

TORONTO — A proposal to take Indigo Books & Music Inc. private would allow the company to get back on track with less scrutiny and more flexibility than if it remained public, experts say.

The company has spent the bulk of the last year recovering from a major cyberattack, coping with a succession of leadership changes and watching its losses mount. It's been using a transformation plan to return the company to its former glory but has said little about what the initiative entails, though it laid off an unspecified number of workers last month.

A privatization proposal announced by the company Thursday would allow that work to continue without public and shareholder pressure, corporate governance experts say.

"I think the rationale is not to be saddled with public reporting responsibilities because Indigo has been through a lot," said Richard Leblanc, a professor of governance, law and ethics at York University in Toronto.

The requirements and costs associated with auditing, compliance and disclosure that come from being listed on the stock exchange are "onerous." There are also certain committee and board structures companies must use.

"You've got significant requirements from a governance point of view," Leblanc said.

"But once you are not listed, then there's very little regulation over governance."

The proposal to take Indigo private was contained in a non-binding offer from Trilogy Retail Holdings Inc. and Trilogy Investments L.P., which would see them pay $2.25 per share in cash for the stake in Indigo they do not already own.

"The offer is very generous, but it's basically the same people on the offer side and also on the receiving side," said Kai Li, the Canada Research Chair in corporate governance who teaches at the University of British Columbia.

Li was alluding to the fact that the Triology companies are owned by controlling shareholder Gerald Schwartz, the Onex Corp. founder and chairman who sits on Indigo's board of directors and is the spouse of Indigo chief executive Heather Reisman.

Through the Trilogy firms, Schwartz owns about 56 per cent of Indigo's issued and outstanding common shares, while another 4.6 per cent belong to Reisman through a different holding company.

Indigo spokesperson Madison Downey said the board has established a special committee of independent directors to evaluate the proposal and "any viable alternatives that may be available to the company."

She did not say how soon the board would review the proposal, but said Indigo would "provide updates if and when necessary in accordance with applicable securities laws."

Reisman retired last summer and turned the business over to Peter Ruis. He left the company abruptly in September, paving the way for Reisman to return.

Before Reisman's retirement as executive chair and a director in August, four of Indigo's 10 directors left the board, with Dr. Chika Stacy Oriuwa attributing her resignation to a "loss of confidence in board leadership" and "mistreatment." Other executives left shortly after.

While Trilogy has yet to publicize how it could shape Indigo, it has said it is not interested in selling any of its shares, which were up 46 per cent to $2.16 in Friday afternoon trading.

"The price already bumped to the level that the privatization proposal offered, so that's suggesting the market already expects the deal will go through," Li said.

One of the benefits of accepting the proposal and going private is that it allows the company to be "drastic" with its transformation, which Li said is much needed.

"Despite all their best effort, they are not doing well. They are bleeding cash," she said.

Indigo saw a net loss of $22.4 million in its latest quarter compared with $15.9 million a year earlier.

"That's not sustainable for them," Li said.

She expects Trilogy's proposal to be accepted because Schwartz and Reisman are such prominent shareholders.

But just because Reisman and Schwartz have a relationship doesn't mean the proposal is a done deal, Leblanc pointed out.

"It wouldn't dissuade a serious investor from counter-offering with a higher proposal," he said.

Several investors would see the chance to own a retailer as big as Indigo as attractive and if they made an offer, Canadian laws require the company to consider it.

Willingness to pay even more for Indigo could push Trilogy to have to boost their bid, Leblanc added.

This report by The Canadian Press was first published Feb. 2, 2024.

Companies in this story: (TSX:IDG)

Tara Deschamps, The Canadian Press