Barnes & Noble Investor Calls for Spinoff Nook Division

Another Barnes & Noble Inc. (BKS) investor called for the largest U.S. bookstore chain to spin off its Nook digital unit into a public company to boost shareholder value.

Investing the cash generated by the company’s stores in the Nook unit over the past three years has been “disastrous” for shareholders, Rick Schottenfeld, chief executive officer of New York-based Schottenfeld Group Holdings, said in a letter to Barnes & Noble founder and Chairman Leonard Riggio dated Dec. 5. The cash should be returned to investors with share repurchases and dividends, Schottenfeld said.

Barnes & Noble has been losing money as it develops and markets the Nook unit to take advantage of a growing preference for digital books. That shift has put more pressure on its retail operations, which posted a drop in sales last quarter.

In February, G Asset Management LLC also called for the Nook unit to be separated. Barnes & Noble has said it has an ongoing strategic review of options to increase shareholder value that includes separating the Nook. It created a subsidiary this year with a $300 million investment from Microsoft Corp. that includes the digital and college bookstore units.

Barnes & Noble rose less than 1 percent to $14.71 at the close in New York. The shares have gained 1.6 percent this year.

Separating the Nook business isn’t happening “fast enough,” Schottenfeld, whose stake in the company is less than $10 million, said in an interview. “The only way they are going to get the proper valuation is by separating these two companies.”

Mary Ellen Keating, a spokeswoman for Barnes & Noble, declined to comment.

Selling Off Stores

Schottenfeld, who met with Barnes & Noble management about a month ago, said he’s also worried the company will sell off the retail business at a cheap valuation.

“There is a meaningful upside in the book business if they keep buying back stock and shrinking the float and taking that cash and returning it to shareholders,” Schottenfeld said. “Shareholders should get the benefit of this cash flow for a little while.”

Sales at its retail unit, which includes its Website, fell 2.9 percent in the quarter ended Oct. 27. Meanwhile, revenue from the Nook unit rose 5.6 percent to $160.3 million. Those results show the Nook unit is ready to stand on its own, Schottenfeld said. Having a mature retail business and a mobile- device maker in the same company is hard for investors to value, he said.

“I’m not bearish on either business,” Schottenfeld said. “I’m just bearish on them living together.”

While Schottenfeld isn’t currently planning to file a shareholder proxy to push for changes, he said that may change over time.

“For now, I wanted to see what other shareholders think, and get them to start pushing management.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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