Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Amazon.com Inc.'s takeover of Whole Foods Market Inc. is giving retail investors a strange hope: Could it be that some of the very internet companies helping to obliterate brick-and-mortar chains may now also desire a physical store presence? 

That's one of the arguments an activist shareholder is making at Barnes & Noble Inc., the bookseller whose eulogy was written years too soon. It still has a $580 million market value with nearly $4 billion of annual sales, albeit both figures are shrinking.

In a letter made public Tuesday, Sandell Asset Management Corp. said it acquired "a meaningful ownership stake" and urged Barnes & Noble's board to "conduct an expansive strategic alternative process," arguing that at this point the stock has been unduly clobbered and would be worth more to a host of buyers than it is to the public market. This is the same investor that agitated at Bob Evans Farms Inc., which wound up selling its restaurant business for an attractive price.

Anyone?
An activist investor is restoring hope that somebody out there wants to acquire the bookseller
Source: Bloomberg

Sandell sees Barnes & Noble's stores as the kind of "beachfront property" that would appeal to internet or media companies seeking quality, high-traffic retail locations in the same way Amazon recently scooped up Whole Foods for a whopping $13.7 billion. Before you laugh, even if it's a stretch to draw comparisons between a popular grocery chain at its prime (no pun intended) and a bookstore business that some have forgotten still exists, Sandell makes other compelling points. 

Just a few weeks ago, Staples Inc. -- another retailer many investors had erased from their takeover wishlists if not written off altogether -- scored a buyout deal with Sycamore Partners, a highly regarded investor in the retail space. Sycamore saw $6.9 billion of value in Staples, a business named for an antiquated office product. The transaction is worth more than 5 times estimated Ebitda at Staples this year. Meanwhile, Barnes & Noble currently trades for 3.2 times Ebitda, one of the lowest valuations in the entire U.S. retail industry. That does seem like an unfair discrepancy, even if both are deservedly cheap. 

Food for Thought
Barnes & Noble is hurting, but is it really worse off than these other struggling retailers that command higher stock valuations?
Source: Bloomberg

On the one hand, Barnes & Noble is one of the last standing national bookstore chains (if not the last) and an obvious victim of Amazon's success. On the other, Barnes & Noble is one of the last standing national bookstore chains and for that reason has value -- to shoppers, publishers, real estate seekers, or at the very least bottom-fishing buyout shops. Barnes & Noble's operations threw off $145 million of cash in the 12 months ended April and its balance sheet is clean.

LBO Feasibility
If Chairman Leonard Riggio can drum up interest in a joint buyout, private equity firms may be able to work with this:
Source: Bloomberg

If there was ever a time for Chairman Leonard Riggio, 76, to team up with a financial sponsor to take his baby private, it's now. It was just a few years ago that Riggio, who is still the largest shareholder, made a run at the retailer, though he scrapped the plan as the Nook e-reader unit continued to lose money hand over fist. Nordstrom Inc.'s founding family is reportedly considering taking its department store chain private to fight retail pressures out of the public eye. Perhaps Riggio could, too. 

Obviously, don't count on a comeback. But -- and I almost can't believe I'm saying this -- Barnes & Noble could still find a deal to close the books on its grueling time as a public company.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net