Schottenfeld Group Holdings Seeks Change in Barnes and Noble Structure to Unlock Shareholder Value

  Schottenfeld Group Holdings Seeks Change in Barnes and Noble Structure to
  Unlock Shareholder Value

  Rick Schottenfeld asks BKS Chairman Riggio to evaluate Nook spin-off into
                               separate entity

Business Wire

NEW YORK -- December 07, 2012

In the wake of the disappointing reaction to Barnes and Noble’s second quarter
earnings, Rick Schottenfeld, Chairman and CEO of Schottenfeld Group Holdings,
is calling for an immediate spinoff of Barnes and Noble’s Nook Media division
into a separately traded public company. Mr. Schottenfeld believes the
company’s current corporate structure prevents shareholders from benefitting
from the significant cash flow of the company’s mature but successful
traditional book retailing business. Schottenfeld asks for the company to
clarify its future strategy.

In a letter to BKS Chairman Leonard Riggio dated December 5, 2012 (attached),
Schottenfeld said:

“We have watched and waited patiently over the past year as management and the
Board of Directors have worked through the process of evaluating the Company’s
options to enhance shareholder value.

“We believe the company’s strategy to deploy 100 percent of its cash flow over
the past three years into the Nook has been disastrous. The approximately
$900,000,000 the Company has lost or invested in this business over that
period represents almost $13 per share which is near today’s current share
price. We believe there were much better uses for our cash flow over this
period.

“Unfortunately, what we are left with today is a dysfunctional business with
two divisions that are seemingly at odds with each other. Barnes and Noble
Retail is the dominant ‘last man standing’ in the physical book business. As
such, this business should be run to maximize free cash flow. This free cash
flow should be returned to the shareholders in the form of share repurchases
and dividends. The Nook Media business is the quintessential growth business
with all of the risks and opportunities associated with such companies. These
two companies are attractive to two distinct groups of investors.

“We are not here to dwell on the past, but rather to look forward to the
Company’s successful future. I have asked management to share its views on the
issues raised in this letter on the last several earnings conference calls and
have yet to receive any meaningful response. It is our hope that by sharing
our thoughts with the Board and other shareholders we can move this process
forward more expeditiously. A split into two separate publicly listed entities
would allow both divisions of the company to run more effectively. It will
provide an option for those investors who are attracted to either the cash
flow of the Retail business or those who want to participate in the growth of
the promising Nook business.

“We urge other similarly minded shareholders to make their voices heard and
implore the Board and management to act without delay.”

About Schottenfeld Group Holdings: Schottenfeld Group Holdings, L.P. is a
diversified investment company and the managing member of Koyote Capital Group
LLC. The companies are headquartered in New York City.


Full text of letter follows:



Mr. Leonard S. Riggio
Board of Directors
Barnes & Noble, Inc.
122 Fifth Avenue
New York, NY 10011

December 5, 2012

Mr. Riggio,

I am the chairman of Schottenfeld Group Holdings. Primarily through our
subsidiary Koyote Capital, we have a significant ownership interest in Barnes
and Noble, Inc. (the “Company”). We have watched and waited patiently over the
past year as management and the Board of Directors have worked through the
process of evaluating the Company’s options to enhance shareholder value. We
were encouraged by the announcement of the Company’s transaction with
Microsoft and the validation it implies for your Nook Media division. We also
understand the complexity of splitting the Company into the two separate
divisions this transaction required. The purpose of this letter is to share
with you our view that with the Microsoft transaction finalized, it is in the
best interest of shareholders for the Company to spin off the Nook Media
division into a completely separate publically listed company. This will allow
current shareholders to benefit from the significant cash flow of the
Company’s mature but successful traditional Book retailing business.

We believe the company’s strategy to deploy 100 percent of its cash flow over
the past three years into the Nook has been disastrous. The approximately
$900,000,000 the Company has lost or invested in this business over that
period represents almost $13 per share which is near today’s current share
price. We believe there were much better uses for our cash flow over this
period. For example, had the Company instead initiated a stock buy-back plan
(using the volume weighted average price over the last three years of $15.40)
the Company could have repurchased approximately 82% of its current shares
outstanding. Alternatively, had the Company initiated a dividend, the stock
could have yielded over 25% for that same time frame. It is clear to us, and
we believe to any other rational investors, that either of these strategies
would have created more value for shareholders.

Unfortunately, what we are left with today is a dysfunctional business with
two divisions that are seemingly at odds with each other. Barnes and Noble
Retail is the dominant “last man standing” in the physical book business. As
such, this business should be run to maximize free cash flow. This free cash
flow should be returned to the shareholders in the form of share repurchases
and dividends. The Nook Media business is the quintessential growth business
with all of the risks and opportunities associated with such companies. These
two companies are attractive to two distinct groups of investors. In order to
truly maximize the values inherent in these businesses they must be separate
public vehicles. Barnes and Noble Retail’s goal should be to work with
publishers on “windowing” new releases between physical and digital form,
expanding margins in recognition of the value of their shelf space for both
physical and digital purchases, and trying to make sure people choose the
physical book experience over digital whenever possible. Nook Media’s goal
should be to put Barnes and Noble Retail out of business. It should try to
make sure nobody ever wants to purchase another physical book again. Clayton
M. Christensen in his renowned book The Innovator’s Dilemma clearly
demonstrates why two such distinctly opposite companies cannot and should not
survive under the same “umbrella”.

We are not here to dwell on the past, but rather to look forward to the
Company’s successful future. I have asked management to share its views on the
issues raised in this letter on the last several earnings conference calls and
have yet to receive any meaningful response. It is our hope that by sharing
our thoughts with the Board and other shareholders we can move this process
forward more expeditiously. A split into two separate publically listed
entities would allow both divisions of the company to run more effectively. It
will provide an option for those investors who are attracted to either the
cash flow of the Retail business or those who want to participate in the
growth of the promising Nook business. If management’s strategy in developing
the Nook bares fruit, those shareholders like us, who believe in both, will
lose no upside and gain the ability of our two companies to pursue their own
self interests. With Microsoft’s $300,000,000 in the bank, and an additional
$305,000,000 available over the next 5 years, Nook Media should have the
capital it needs to go forward alone. It can also pursue further funding and
capital free from the inherent conflicts of interest that exist today. A free
standing Barnes and Noble Retail would be able to return its next $900,000,000
to shareholders. We urge other similarly minded shareholders to make their
voices heard and implore the Board and management to act without delay.

Rick Schottenfeld
Chairman & CEO
Schottenfeld Group Holdings

Contact:

Schottenfeld Group Holdings, L.P.
Carolyn Andoscia, 212-475-2122
 
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