Reasoning Behind Borders Group 'Cut to Sell' at Goldman Sachs (BGP)

When a bulge bracket firm issues a ‘Sell’ rating on a stock, you always have to consider the reasoning.  ‘Sell’ recommendations can cause many more backlashes historically than other downgrade and ratings changes, particularly since the description leaves such little leeway in the interpretation.

Goldman Sachs downgraded Borders Group (BGP-NYSE) this morning from a ‘Neutral’ to a "sell’ rating. and BGP shares are down more than 6% as a result.  Technically an analyst downgrade based on indirect news is technically not a game-changer, but there are instances where this is not the case.

The reasoning behind the downgrade actually has some ties to the Federal Trade Commission trying to block the proposed merger between Whole Foods (WFMI-NASDAQ) and Wild Oats (OATS).  Goldman notes that the market has been expecting a more permissive merger environment, even though the proposed XM Satellite Radio (XMSR-NASDAQ) and SIRIUS Satellite Radio (SIRI-NASDAQ) is under fire by the FCC.

Goldman believes that the prior share price of Borders (BGP) was pricing in the possibility of a transaction, and the new merger climate might be less permissive to such a deal.  It also states that shares are overvalued on a purely fundamental basis and trimmed its 12-month target by $1.00 to $19.00.  Shares are down more than 6% to $20.35 so far, and the 52-week trading range is $16.20 to $24.19.  Its key competitor, Barnes & Noble (BKS-NYSE), is trading down 0.8% at$41.85 on the day. 

It will be interesting to see if Goldman takes the air out of other ‘potential merger candidates’ in the coming days and weeks.  These are actually small businesses in the grand scheme of things:  Borders Group has a $1.2 Billion market cap, and Barnes & Noble has a $2.7 Billion market cap.

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.