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No Buyers for Barnes & Noble at 60 Cents on Dollar: Real M&A

Even with Barnes & Noble Inc. (BKS) selling for 60 cents on the dollar, the cheapest retailer in America still isn’t cheap enough to entice private-equity buyers looking for cash.

The bookseller founded by Leonard Riggio fell 28 percent through yesterday since putting itself up for sale seven months ago, according to data compiled by Bloomberg. Losses accelerated after the New York-based company eliminated its dividend in February, leaving Barnes & Noble at a 15-year low last week. The chain is the only U.S. retailer with a value of more than $500 million trading at a discount to its net assets.

Barnes & Noble retreated 80 percent through yesterday since rising to a record five years ago as Riggio, who bought the bookstore in 1971, fell behind Amazon.com Inc. (AMZN) in selling books over the Internet and starting an electronic reader business. Now, with Barnes & Noble piling money into its Nook reader to compete with the Kindle and Apple Inc. (AAPL)’s iPad and analysts projecting its first loss in a decade, the only buyer left may be Riggio himself as private-equity firms back away after the bankruptcy of Borders Group Inc., according to Wall Street Strategies Inc. in New York.

“There’s not much to like,” said Brian Sozzi, Wall Street Strategies’ retail analyst. “One thing I’ve learned in retail is once the model starts to go against you it’s tough to pull yourself out. Assets on their books are losing value so quickly. Other than Riggio, I don’t know who else would want it.”

Digital Divide

Barnes & Noble, which began exploring a sale in August, will likely end its search without a buyer as private-equity firms and strategic bidders backed away from the auction, five people with knowledge of the process said this week.

Some potential bidders balked at a purchase because of how long it may take Barnes & Noble to generate more digital sales, said two of the people, who asked not to be identified because negotiations aren’t public. Still, the auction isn’t over and will probably last a few more weeks before Barnes & Noble officially calls off the search, one of the people said.

The process is still ongoing, Mary Ellen Keating, a spokeswoman for Barnes & Noble, said in an e-mail.

The company’s shares slipped 0.3 percent to $9.22 in New York Stock Exchange trading today. The Standard & Poor’s 500 Index advanced 0.3 percent.

Kindle, Nook

Bookstores have been losing customers as more people shop online and switch to reading digital content with devices such as Amazon.com’s Kindle, which has 67 percent of the U.S. e- reader market, according to Goldman Sachs Group Inc.

Barnes & Noble, the largest U.S. bookstore chain, released its Nook in October 2009, about two years after the Kindle. Nook has a 22 percent share, New York-based Goldman Sachs said.

Barnes & Noble’s closest competitor, Ann Arbor, Michigan- based Borders, filed for bankruptcy protection last month after losses of almost $800 million since 2006. The retailer is trying to restructure in court by closing 200 stores.

“Barnes & Noble needs to do immediately what Borders waited too long to do,” said Jim McTevia, of Bingham Farms, Michigan-based McTevia & Associates, a turnaround consultant. It needs to start closing stores and “taking steps now to restructure this company before it’s forced into a Chapter 11” bankruptcy, he said.

“Borders has had a number of strategic decisions along the way that were very different than Barnes & Noble,” Barnes & Noble’s Chief Financial Officer Joseph Lombardi said in an interview yesterday. “In June of last year we stood up in front of the investment community and said this was our plan we were going to execute. We are well on our way and positioning ourselves beautifully to participate in the e-book market.”

Greenwich Village

Riggio, 70, started in 1965 with a college bookstore in Manhattan’s Greenwich Village. In 1971, he bought the Barnes & Noble name and its flagship store in Manhattan. The company expanded through acquisitions, buying B. Dalton Bookseller and Doubleday Bookshops. Since reaching an all-time high of $47.40 on March 16, 2006, shares of Barnes & Noble tumbled to $9.25 through yesterday, wiping out more than $2.5 billion in the company’s market value, data compiled by Bloomberg show.

Including dividends, which the bookseller decided to stop paying last month, the drop would still be more than 75 percent, the data show. That compares with a 51 percent return for retailers in the Standard & Poor’s MidCap 400 Index.

Amazon.com of Seattle, the largest online retailer, has given shareholders an almost fivefold return on their investment in the same period, data compiled by Bloomberg show.

Relative Value

Barnes & Noble is now the only U.S. retailer valued at a discount to its net assets. The company sells for 0.6 times its book value, or assets minus liabilities, which is less than 94 other U.S. retailers with market values of more than $500 million, according to data compiled by Bloomberg.

The bookstore chain also commands less per dollar of revenue than any of its competitors, with its shares trading at 0.08 times sales in the past 12 months, the data show.

The valuation discounts are “synonymous with companies that are really struggling,” said Michael Souers, an analyst for Standard & Poor’s in New York. “From a valuation perspective, it does look attractive but there’s concern about longer-term trends and little momentum in the near term.”

Even with Barnes & Noble trading at a level suggesting shareholders have more to gain from firing its managers and liquidating the company, private equity firms are wary of putting money into Barnes & Noble because it doesn’t generate enough cash to support a leveraged buyout and lacks property to sell off, according to Oscar Gruss & Son Inc.’s Bill Kavaler.

Cash Flow

Barnes & Noble ran a deficit from operations, after deducting capital spending, of $166 million in the past 12 months, one of only two mid-sized U.S. retailers with a shortfall in free cash flow, data compiled by Bloomberg show.

“It’s not generating cash, the future is too uncertain, the ability to lever the company is constrained,” said Kavaler, a special situations analyst at Oscar Gruss in New York. “It’s not a private-equity thing.”

Barnes & Noble has sacrificed profits over the past year to invest in its digital strategy, losing $14.5 million in the nine months through January. Competition has increased as Cupertino, California-based Apple started selling e-books and released the iPad, which can be used to buy and read digital titles.

While the Nook line of readers has become the company’s best-selling product and boosted same-store sales last quarter for the first time since 2007, Barnes & Noble only retained 26 cents for each dollar of sales in the past 12 months after subtracting the cost of goods sold, data compiled by Bloomberg show. That’s the lowest of any mid-sized U.S. retailer.

‘Transitioning Itself’

Net income has fallen in each of the past three years and analysts now estimate that Barnes & Noble will lose money this year and next. The company doesn’t disclose how much income it makes on its e-readers and analysts including S&P’s Souers say the Nook is sold for a minimal profit or a loss.

“Barnes & Noble is trying to work on transitioning itself, it’s just the answers aren’t clear,” said Timothy Ghriskey, chief investment officer at the Solaris Group LLC in Bedford Hills, New York, which manages $2 billion. “A potential acquirer hasn’t stepped forward and said this is a great value here and I’m just not sure who that acquirer would be.”

Riggio, the largest shareholder, and the rest of the board began examining a possible sale under pressure from Ron Burkle, who began building a stake in the company in late 2008.

Poison Pill

The board responded to Burkle’s purchases by introducing a so-called poison pill in November 2009 to limit his ownership to 20 percent. Yucaipa Cos., Burkle’s Los Angeles-based investment fund, sued to overturn the pill and lost. Yucaipa held almost 19 percent of Barnes & Noble as of October, compared with about 30 percent for Riggio, according to data compiled by Bloomberg.

Since August, the company’s market value has dwindled from more than $750 million to $555 million, the data show.

By taking Barnes & Noble private himself, Riggio would be able to run the company without having to answer to other shareholders, according to Kavaler at Oscar Gruss. Riggio told the company’s board he would consider joining an investor group to acquire Barnes & Noble, according to a statement in August.

“This shouldn’t be a public company and it shouldn’t be a private equity company,” Kavaler said. “It should be a private, family-held company. When it works they make a lot of money, and when it doesn’t work it doesn’t cost anybody outside of the family anything.”

Overall, there have been 5,420 deals announced globally this year, totaling $549.5 billion, a 22 percent increase from the $450.9 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Robin Ajello at rajello@bloomberg.net.

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