Barnes & Noble - Deal or No Deal?

[SensualPoet]

As was discussed in this thread, Barnes and Noble reported unsettling sales and earnings performance at the end of Apr, its fiscal year end. Its Nook business was worth $250 million in sales in the last quarter but its selling expenses left it with a loss for the period.

A year ago, the Riggio family which owns 30% of the company fell into a bitter dispute with an investment fund headed by Ron Burkle which owns 20% of the company. The Riggios won but Burkle still holds his share. For the next several months, the company was officially up for sale but no serious bidder emerged. The company withdrew the offer to sell.

Finally, in late Spring, John Malone of Liberty Media (QVC and the Home Shopping Network among other interests) announced he'd be willing to invest $1 billion to buy the 70% not owned by the Rigio's provided the Rigio's stayed on as owners and management (B&N having done so well ...). But time ticks by and, despite both principals saying nice things about each other in early July, this week reports surfaced that Liberty Media was having cold feet. The deal was worth $17 a share; today the stock closed at $15.66 and some analysts are openly pegging the true value at around $14. Still, they are definitely still talking.

Next stop will be late Aug / early Sep when the B&N board of directors next meets formally and presumably will be asked to approve the deal or ask for modifications. And, Borders will have closed for good by then, removing 600 stores that were competing directly with B&N this time last year.

With the Nook Touch and Nook Color business continuing to grow, even at a reduced share price, Malone's bid would be most welcome. The potential for an infusion of working capital might put some real umphh under company for the first time in several years.

[fjtorres]

Would B&N be worth more as a pure digital play?
As a dot-com without the anchor of the storefront leases?

What value for 25% of the US ebook business with potential to grow worldwide?

[Andrew H.]

Originally Posted by SensualPoet

With the Nook Touch and Nook Color business continuing to grow, even at a reduced share price, Malone's bid would be most welcome. The potential for an infusion of working capital might put some real umphh under company for the first time in several years.

Are you sure he'll put in working capital? Buying 75% of the shares will give money to the shareholders, but none to the company.

Originally Posted by fjtorres

Would B&N be worth more as a pure digital play?
As a dot-com without the anchor of the storefront leases?

What value for 25% of the US ebook business with potential to grow worldwide?

That's a great question. I wish I knew the answer...

[SensualPoet]

I suppose the challenge there is the Nook business for B&N is more potential than reality. They've done very well in the US market and that business grows -- but the revenues is a fraction of B&N retail and college stores. It's hard to see the B&N board recommended the Kraft solution: splitting off the snacks from the groceries ....

[JSWolf]

Originally Posted by fjtorres

Would B&N be worth more as a pure digital play?
As a dot-com without the anchor of the storefront leases?

What value for 25% of the US ebook business with potential to grow worldwide?

We don't know it's 25%. That 25% is based on guesses. So let's just do away with this guesswork number.

[SensualPoet]

Originally Posted by Andrew H.

Are you sure he'll put in working capital? Buying 75% of the shares will give money to the shareholders, but none to the company.

No guarantee whatsoever; that's why I used the word "potential".

Malone's offer includes assuming $450 million of B&N outstanding debt, in addition to the purchase of the shares from existing shareholders (meaning the Riggio family get $0 since the deal requires them to hold their shares and keep working the business).

It's not clear exactly what Malone could so with the company, given his other assets, unless there was another pool of money ready to accelerate projects like the expansion of Nook penetration -- possibly even outside the US.

[JSWolf]

I do think with Borders going away, B&N will be worth more as it will become harder and harder to find other book stores to go to.

[SensualPoet]

Originally Posted by JSWolf

We don't know it's 25%. That 25% is based on guesses. So let's just do away with this guesswork number.

That is Barnes and Noble's claim (actually "26-27% of the US ebook market"). Analysts who plot these things for a living generally accept this as a valid figure and no one -- publishers or Amazon -- have come forward to dispute it. So, as ballparks go, it's good enough.

[fjtorres]

Originally Posted by SensualPoet

I suppose the challenge there is the Nook business for B&N is more potential than reality. They've done very well in the US market and that business grows -- but the revenues is a fraction of B&N retail and college stores. It's hard to see the B&N board recommended the Kraft solution: splitting off the snacks from the groceries ....

The kraft solution?
Who would want the storefronts without the online component?
At a time we're already seeing pbook sales declining?
(Malone has good reason to need foot warmers.)
The price would have to be really low...
Take online and Nook away and what remains looks a lot like Borders; worth more in liquidation.

That board meeting should produce interesting minutes.

[SensualPoet]

Exactly. No one wants the storefronts alone. And the current owners of both know that too -- they'd be nuts to spin off the Nook business ... sell the diamonds, keep the lumps of coal.

But I do think there is some longer term residual value in the college division (especially tied to an online / ebook store) and figuring out how to gently downsize the retail footprint over time. No one needs a 40,000 sq ft bookshop.

[GreenMonkey]

Originally Posted by fjtorres

Would B&N be worth more as a pure digital play?
As a dot-com without the anchor of the storefront leases?

What value for 25% of the US ebook business with potential to grow worldwide?

Despite claims (and wishes of some) the paper book business is far from dead.

In my town (of 40,000 people), the only Waldenbooks store gone probably 7-8 years ago. B&N has been the only place to buy new books for years now. With Borders gone I'm sure things will improve for them. I'd bet my local B&N does pretty good business due to its lack of competition - there's certainly always a lot of people in there.

As far as seperating the digital and physical arms...bad move. I think the hands-on returns, tech support, and experience with devices is what helps give them some oomph vs the Amazon kindle juggernaut. Even I appreciated the customer service could look at the thing when I took my NC in for its flickery-at-low-brightness display. Of course both other units had the flicker so I kept it (fixed by CM7...thanks homebrew community).

[Fbone]

The stock market has been down the last 10 days. The major indices are in negative territory for the year. Most companies look cheaper. Perhaps Mr Malone feels he should lower his offer to reflect current market prices.

I've noticed B&N has been emailing discount coupons regularly. Latest was 15% off. It is a little worrying but most likely a response to Borders liquidation. Borders went very aggressive with these discounts before closing.

[GreenMonkey]

Originally Posted by Fbone

The stock market has been down the last 10 days. The major indices are in negative territory for the year. Most companies look cheaper. Perhaps Mr Malone feels he should lower his offer to reflect current market prices.

I've noticed B&N has been emailing discount coupons regularly. Latest was 15% off. It is a little worrying but most likely a response to Borders liquidation. Borders went very aggressive with these discounts before closing.

B&N always runs those coupons. There's a thread on the DVDtalk forum that the DVD buying folks track them in (almost weekly) that I'm subscribed to. I don't think there's been an uptick on the coupon front.

[fjtorres]

[QUOTE=GreenMonkey;1689198]Despite claims (and wishes of some) the paper book business is far from dead.
/QUOTE]


The issue isn't whether the print book business is dying or not, but rather how profitable the big brick-and-mortar superstores can be in a fragmented retailing environment where over 25% of all books are sold online and another 15% are ebooks, plus another 10-15% are sold by department stores, pharmacies, supermarkets, etc; all venues with lower operating costs and lower sales prices than what the superstores can profitably match.
People are still buying pbooks (about 85% of book sales are still print) and with Borders gone, B&N will likely end up with over a third of the total US market. But the value of their share is declining; as the recent Penguin report made clear, the median price of books is declining along with the decline in total print book volume. Less books sold at lower prices isn't the best way to pay for the leases on those pricy superstores.
Print books aren't dying, but the regional superstore business model is.

If B&M pbook retailing is to be profitable in coming years the storefronts need to get smaller and they need an answer to the convenience and pricing of online (and ebooks) as well as the ubiquity of the alternate channels. Both.
That's a tough row to hoe.

Borders had no credible plan and they ended up in liquidation.
B&N has a credible plan but they are short of resources to carry it out and without a capital infusion risk running out of time to carry it out.

[SensualPoet]

Originally Posted by SensualPoet

Finally, in late Spring, John Malone of Liberty Media (QVC and the Home Shopping Network among other interests) announced he'd be willing to invest $1 billion to buy the 70% not owned by the Rigio's provided the Rigio's stayed on as owners and management (B&N having done so well ...). But time ticks by and, despite both principals saying nice things about each other in early July, this week reports surfaced that Liberty Media was having cold feet. The deal was worth $17 a share; today the stock closed at $15.66 and some analysts are openly pegging the true value at around $14. Still, they are definitely still talking.

B&N lost 9% more of its value today closing pretty much at $14. That has to be unsettling and certainly suggests the Liberty Media offer of $17 is slipping away. Technically, you could snap up shares at $14 today and, when the Liberty Media deal is signed off in a few weeks, make a cool 21% on your money. Alternately, it might also mean the deal is being discussed at a lower price or perhaps cancelling the offer altogether.

One is reminded of the deal to take over Yahoo! by Microsoft when the deal was $30 and Yahoo! said "no way". Yahoo! has since laid off more than half its staff and trades at $11. Sometimes you need to strike when the iron is hot. Granted recent events in the stock market are unusual but it is sobering. I mentioned before that Liberty Media can take its time given no one was interested in Borders ... why pay more for B&N?