Investors circle Barnes & Noble as it plans Nook spin-off
Could compete with the iPad...
Barnes & Noble has had a troubled few years. Part of the problem is that it continues to be a tablet business with a chain of bookshops connected to it rather than the other way around – with the tablet and ebook reader business growing at a savage pace, while the bookshop dawdles. But it clearly needs a new owner, and to that extent the financial vultures are circling – and a particularly clever and ruthless vulture, in the form of Jana Partners, has acquired just under 12 per cent of the business, in a new share issue, so clearly a move approved by Barnes & Noble management.
Increasingly the shareholding is narrowing into fewer and fewer hands, with the founder Leonard Riggio still owning 29.7 per cent, and John Malone's Liberty with some 16.6 per cent of the stock, through his $204m rescue of the business last year. A number of companies have fought in the past over ownership and potential breakup of Barnes & Noble.
The war for the fate and ownership of B&N goes all the way back to 2008 when it was harassed by the corporate adventurer Ronald Burkle through a group called the Yucaipa Funds. It built a stock position which forced the company to adopt a poison pill, which was set to expire during 2012, which kept the Yucaipa holding under 20 per cent. This is what necessitated the Liberty rescue move in the first place.
Yucaipa had been buying in an environment where B&N was valued at under $1bn, but had revenues which were around $6bn and growing rapidly, all due to the fact that company was close to having a negative net worth. That holding is still in place at 19.8 per cent and in recent months there has been further activity, with a further 3.3 million new shares (around 5 per cent) going to Dimensional Fund advisors in December, and in February two further new share transactions of 6 million and 3 million shares for FMR and F Asset Management. All this adds up to around 85 per cent of the company's equity – leaving management and outsiders with the rest.
Clearly this is a jockeying for position prior to the company changing direction. Back in December, with the first of those recent investments, Barnes & Noble began exploring strategic steps for the Nook as a separate business, on the back of more stunning Nook sales – up 70 per cent over the previously year.
By separating the Nook ereader and tablet business, Nook can take separate funding from Barnes & Noble, and it has the potential to become a genuine contender to compete with both the iPad, but more importantly the Amazon Kindle Fire and its range of ereaders. Already the company is talking about taking the Nook outside of the US through strategic partners, which would bolster its sales significantly.
By adding Jana Partners' involvement this week there is the potential for an even more convoluted deal. Jana owns a significant piece of McGraw Hill and has been pushing for its breakup as well, separating the text book publishing business from financial services
If the Nook, through the Jana connection, could be sold with a captive textbook market place, courtesy of McGraw Hill, as well as an arms-length bookshop relationship with Barnes & Noble, the deal has the potential to create a mini-Amazon, and through internationalisation, a genuine force in eBooks as well as in tablets generally.
It now looks like the final financial pieces are being set in place to free the Nook from B&N ownership, and turn it into either an independent consumer electronics play, or more likely, a quick sale to a consumer electronics major, as a new front in tablets, already popular and established in the US, with its own content platform.
Shares in B&N climbed higher immediately on the news that Jana Partners had taken a stake.
If the Nook can be sold off or separately floated, it will provide a cash cow for B&N – which will help Founder Riggio focus on the business he knows so well: book sales.
In the quarter ended 28 January, B&N had revenues of $2.44bn, but made only $52m profit, and showed an $11m loss in the nine months of the year to date and it had just $27.4m in the bank – nothing like enough to run a major book retail empire.
Copyright © 2012, Faultline
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