Barnes & Noble Mulls Sale Under Pressure From Burkle

Barnes & Noble Inc., under pressure from activist investor Ron Burkle, put itself up for sale as a shift to digital books led to losses at the biggest U.S. bookstore chain. The stock jumped the most in a decade.

The board appointed a committee to evaluate strategic options, including a sale, Barnes & Noble said in a statement yesterday after markets closed. Chairman Leonard Riggio, the company’s founder and biggest shareholder, told the board that he may participate in an investor group to acquire the company.

Burkle’s Yucaipa Cos. sued Barnes & Noble in May and is seeking to invalidate the company’s poison-pill defense against takeovers so he can boost his stake in the bookseller. In July court testimony, Riggio said he has a “strong preference” for being Barnes & Noble’s largest holder. Riggio owns about 30 percent, while Burkle holds a 19 percent stake.

“A buyout makes sense,” Morningstar’s Peter Wahlstrom said in a note to clients today. The move would allow Barnes & Noble to invest more in e-reader software, and also let the bookseller lower its dividend, freeing up cash, the Chicago- based analyst said. He advises investors to hold onto the shares.

Barnes & Noble rose $2.47, or 19 percent, to $15.31 at 4:02 p.m. in New York Stock Exchange composite trading, the largest gain since November 2000. Rival Borders Group Inc., the second- largest U.S. bookstore chain, advanced 3 percent after climbing as much as 9.9 percent.

Court Spat

Last month in Delaware Chancery Court, Barnes & Noble director Patricia Higgins testified that in a meeting on Nov. 17, Riggio told the board Burkle wanted Barnes & Noble to buy Ann Arbor, Michigan-based Borders. Burkle testified that he told Riggio buying Borders was a bad idea.

The board approved the poison pill, which would allow holders to buy large amounts of stock at a discount if another investor gains a stake of 20 percent or more, during that meeting.

“You’d have to be smoking something pretty powerful to think a merger would be a good idea,” Michael Norris, a senior analyst for Simba Information Inc., a Stamford, Connecticut- based research consultant, said in an e-mail today. “If they were to combine, they’ll spend over a year thinking about what redundant stores to close and the whole will end up being less than the sum of its parts.”

Market Value

Lazard will serve as financial adviser to the Barnes & Noble special committee. The New York-based bookseller had a market value of $755.7 million before today’s trading and had $260.4 million in long-term debt as of May 1.

In the past 10 years, the largest acquisition in retail bookstores was Basel, Switzerland-based Dufry Group’s $706 million deal, including debt, to buy U.S. newsstand chain Hudson Group in 2008, according to data compiled by Bloomberg. Last year, Barnes & Noble acquired Barnes & Noble College Booksellers Inc. from Leonard Riggio for $514 million, a deal Burkle criticized in a court complaint.

Yucaipa said in court filings that directors had a “self- dealing scheme” designed to entrench the Riggio family’s dominance of the company. The parties are awaiting a Delaware judge’s decision on whether Barnes & Noble’s corporate anti- takeover defense is flawed and unfairly bars suitors from starting proxy fights to win control of the bookseller.

Riggio Brothers

Stephen Riggio, Leonard Riggio’s brother who is the company vice chairman, owns 4.1 percent of Barnes & Noble, based on a regulatory filing.

Burkle didn’t respond to calls for comment. He said in court papers he is buying stock to enhance his ability to put candidates on the board and improve company operations.

Barnes & Noble has tried to offset declining sales at its bookstores by investing in its digital book reader, the Nook, and applications to sell e-books. The company said in June that its market share of digital books in the U.S. grew to 20 percent from 2 percent since releasing the Nook in November.

“Putting Barnes & Noble on the auction block at this point seems a bit poorly timed since it doesn’t allow the company to see what the long-term effect of the Nook’s success will do for its future prospects,” James McQuivey, an analyst at Forrester Research Inc. in Cambridge, Massachusetts, said in an interview. “Or perhaps things are worse in bricks and mortar than we assume and they can’t wait for Nook to mature.”

The company in June also forecast a possible loss of as much as 40 cents a share for the fiscal year because of a $140 million investment in its digital book unit.

Competing E-Readers

Borders started selling digital books through its website last month in a bid to boost revenue and reverse four consecutive annual losses. Its goal is to capture 17 percent of digital book sales in the U.S. within a year.

“The only thing that’s going to really goose the stock price in the long term is to actually sell one book at a time to one person at a time, over and over and over, and actually make a renewed commitment to book-selling practices that work,” said Norris, the analyst at Simba Information. “The thing I want to see most of all is comparable store sales increases.”

The Nook is up against devices from Amazon.com Inc. and Apple Inc. Last month Amazon.com introduced two versions of its Kindle e-reader, including a $139 model that works with Wi-Fi and one for $189 that uses 3G mobile technology and Wi-Fi to download books. Apple’s iPad also features an e-reader and connects to a book store.

Barnes & Noble anticipates U.S. sales of trade books will increase 17 percent to $27 billion by 2014, and digital titles will comprise more than 20 percent of that, up from less than 5 percent this year. U.S. digital book sales tripled last year to $313.2 million, as the total market declined 1.8 percent to $23.9 billion.

In March, Barnes & Noble promoted William Lynch, the head of its website, to chief executive officer as it deepened its push into digital retail. Lynch joined the company in February 2009 and helped introduce the Nook last October.

To contact the reporter on this story: Duane Stanford in Atlanta at dstanford2@bloomberg.net; Matthew Boyle in New York at mboyle20@bloomberg.net

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