Barnes & Noble Agrees to Spin Off Nook Unit as Sales Decline

June 25 (Bloomberg) -- Barnes & Noble facing declining sales at both its bookstore chain and Nook electronic-reader business, agreed to split them into separately traded companies in a bid to improve their performance. Alix Steel reports on “In The Loop.” (Source: Bloomberg)

Barnes & Noble Inc. (BKS), facing declining sales at both its bookstore chain and Nook electronic-reader business, plans to split them into separately traded companies to improve performance.

The spinoff will be completed by the first quarter of next year, New York-based Barnes & Noble said today in a statement. The company also reported fourth-quarter results, with the bookstore chain’s same-store sales falling and the Nook unit posting continued losses. Barnes & Noble said same-store sales would decline in the “low-single digits” this fiscal year.

The breakup follows years of prodding by investors and analysts who’ve said the units would be more valuable on their own. While both are facing sluggish sales, the bookstore chain remains profitable. The Nook business, which sells electronic readers and content for the devices, has struggled to make money competing with Amazon.com Inc.’s Kindle and Apple Inc. (AAPL)’s iPad.

“The company has not had an easy time over the last couple years,” said John Tinker, an analyst at Maxim Group LLC in New York. “They’re now moving ahead in a logical fashion to separate what are very different businesses.”

The retailer’s shares rose 5.3 percent to $21.65 at the close in New York. The stock has climbed 45 percent this year.

Higher Valuations

A year ago, analysts estimated that the company would be worth 44 percent more if the businesses were separated, in part because it would make it easier for a buyer to take over one or both divisions. Barnes & Noble’s current market value is about $1.28 billion.

Under the separation, the college unit will remain part of the Nook business. Barnes & Noble’s college division operates 700 bookstore locations through revenue-sharing agreements with schools without taking on the leases.

“The intent behind the proposed separation is to really drive focus behind the two different businesses with focused boards and focused management teams,” Chief Executive Officer Michael Huseby said in a phone interview. “Retail is doing very well. On the other side of the coin, you have Nook, which has college and the Nook consumer business. College is poised for significant growth.”

The company was “not necessarily” considering the possibility of a takeover in deciding to separate the businesses, Huseby said.

“Any time you announce a proposed separation, there’s this kind of speculation,” he said.

Scaled Back

Barnes & Noble had already scaled back investment in the Nook unit, which has lost money for years. The company announced plans to team up with Samsung Electronics Co. (005930) to introduce a co-branded tablet in August that will carry Nook software and content. That lets Barnes & Noble shift away from the costly business of producing hardware.

Barnes & Noble’s fourth-quarter net loss narrowed to $36.7 million, or 72 cents a share, from $114.8 million, or $2.04, a year earlier. The retail segment generated $53.1 million in earnings before interest, taxes, depreciation and amortization last quarter. The Nook unit, meanwhile, lost $56 million on an Ebitda basis, and the company said the red ink will continue this year.

“The Nook losses have been masking everything else,” Tinker said. “People are still reading physical books, and it’s still throwing off cash, but all that is masked by the Nook.”

Nook Sales

Barnes & Noble’s total revenue rose 3.5 percent to $1.32 billion, lifted by growth at its college business. Nook sales accounted for less than 10 percent of the total, while almost three-quarters came from the retail operations. The college unit, which includes lucrative textbook sales and rentals, made up the rest.

Huseby said he doesn’t expect to announce any major changes in management as part of the split. He said his own role is “to be determined.”

Huseby joined the bookseller in 2012 as chief financial officer after working in the cable industry and took over as CEO in January. Billionaire John Malone’s holding company, Liberty Media Corp., had offered to buy Barnes & Noble for about $1 billion in 2011, then dropped the bid in favor of buying $204 million in preferred shares. In April, Liberty said it would sell most of that stake.

Riggio Plan

Barnes & Noble’s founder and chairman, Leonard Riggio, made his own run at the business last year, announcing his intention to break up the company by acquiring its stores and website. He abandoned the plan months later. Riggio declined to comment today.

G Asset Management LLC proposed in February to acquire 51 percent of the company at $22 a share, valuing the total business at $1.32 billion. The firm also offered to buy 51 percent of the Nook business as an alternative deal. It said at the time it was confident that separating the business would unlock “substantial” shareholder value. In 2012, the firm also called for a Nook spinoff.

Barnes & Noble said today it has engaged Guggenheim Securities LLC as financial advisers and Cravath, Swaine & Moore LLP as legal counsel.

“This is a very complicated company,” Tinker said. “For Wall Street, the simpler the stock, the better you can value it.”

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Orland, John Lear

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