Breakout

Barnes & Noble Shareholders Need to Take What They Can Get

Jeff Macke
Breakout

Last week Barnes & Noble (BKS) founder Leonard Riggio expressed an interest in buying the company's 677 book stores. Riggio made it clear that he has no interest in bidding for the Nook Media subsidiary which, until recently, was thought to be Barnes & Noble's best chance at survival.

The biggest hurdle to Riggio's proposal is price; specifically how much is Nook worth? Last April Microsoft (MSFT) invested $300 million in Nook, and in December British publisher Pearson kicked in another $89.5 million for a 5% stake. Based on the price of those investments, Nook Media is worth about $1.8 billion, making Barnes & Noble's 78.2% of the company worth about $1.4 billion.

The company has a current market cap of less than $1 billion. In terms of performance in the most recent quarter, EBITDA at the stores was $212 million on $1.5 billion in revenues. The Nook segment lost $190 million on $316 million in revenues.

As the debate between Riggio and the board of directors heats up, the major issue figures to be which of the business segments is dragging the company lower. In order to get the lowest price, Riggio will point to the the Microsoft and Pearson deals as evidence that the stores are of little to no value. In order to counter his argument the board will need to concede that its new business partners got fleeced when they put money into the Nook.

Retail expert Hitha Prabhakar thinks Barnes & Noble needs to get the deal done or risk ending up with nothing at all. The stores are carving out good profits but they're doing so on shrinking revenues. The company is slowing down investments in its store base at a time when customers are searching for reasons to shop someplace other than Amazon (AMZN).

"The best possible scenario is if they have a lower value on the Nook business and take the retailers private," says Prabhakar in the attached video. The stores will never be valued on the Street as anything other than a wasting asset. The only chance is to reorganize while private.

As for the Nook, the situation is more complicated. If the segment were a dog it would be time to put it sleep. It has no technological edge, withering competition, and no viable plan unless B&N can find another company to put a $1.8b value on a company with negative margins and plunging revenues.

Riggio holds the cards. He can wait for the market to take Barnes & Noble to the woodshed and bid for the stores later or strike a deal now at a price shareholders will certainly find offensive. Barnes & Noble and Nook have no value together and minimal values apart. Sometimes it's best for shareholders and boards to admit defeat and take what they can get.

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