11/09/2011 11:56 EST | Updated 01/09/2012 05:12 EST

Ereader Kobo needed a bigger investor to grow, says Indigo CEO Reisman

TORONTO - The head of Indigo, Canada's biggest book retailer, says selling its stake in the Kobo ereader to a Japanese electronic commerce company will put enough financial kick behind the device to help it compete with the tablets of major competitors Apple and Amazon.

Heather Reisman, CEO of Indigo Books & Music Inc. (TSX:IDG), said Wednesday that Tokyo-based Rakuten Inc. is an ideal fit to take on the 51-per cent ownership stake in Kobo.

She says the Japanese firm has the ability to invest the $100 million to $150 million that's needed over the next year to advance Kobo's technology and grow its customer base.

"We reached a point where we felt that he best thing for Kobo and Indigo ... (was) to make sure they're positioned for the biggest possible success," Reisman said in a phone interview.

"One big part of my decision to go ahead with the sale at this moment was because I believed firmly that the best future for Kobo would be with a partner of the scale of Rakuten."

The transaction comes as more readers turn to digital books instead of traditional hardcovers and paperbacks, which has put a pinch on many retailers, including Indigo. U.S. bookstore chain Borders, which owned 11 per cent of Kobo, went bankrupt earlier this year as its sales dwindled.

Indigo has worked to avoid such a drastic downturn in its sales by refocusing its operations to include toys, gifts and other household decor items.

On Tuesday, the company reported a loss of $40.4 million in the second quarter as Indigo and Chapters stores posted a 4.3 per cent decrease in revenue, while sales at its smaller format stores were down 2.9 per cent.

Sales in the Kobo division were up 219 per cent, marking one of the few bright spots in the quarter.

Kobo has been a rapidly growing part of Indigo's overall retail business. However, the global market for ebooks is intensely competitive and it takes some financial muscle to invest in its continued growth.

The company secured $50 million in financing earlier this year, which was intended to fund its international expansion, though Rakuten's investment will be larger.

"They also bring a huge customer base that will quickly be able to engage with Kobo and see how great Kobo is as an option," Reisman said.

Indigo founded Kobo and spun the company off in 2009 to compete in the global ebook sector against industry leader Amazon, as well as Apple and a multitude of other companies with devices, software or services.

Kobo has been quickly catching up to Amazon's Kindle with its own reader and distribution system. However, ebook sales are also quickly eating into profits of traditional bookstores like Indigo and its Chapters division.

Indigo expects to receive between US$140 million and $150 million from the sale of its stake, which Reisman says will largely go towards investing in Indigo's existing businesses and new areas of growth.

The book retailer has spent the past several years expanding its product offerings into gifts and toys, and it plans to continue selling the Kobo at its stores.

Kobo's other investors include Australian book and music chain RedGroup Retail and Cheung Kong Holdings, an investment company controlled by Hong Kong billionaire Li Ka-shing.