Barnes & Noble Gains on Founder’s Retail Buyout Plan

Barnes & Noble Inc. gained after Chairman Leonard Riggio said he will offer to buy the stores and website of the chain he founded more than 40 years ago as it struggles to navigate the rising popularity of digital books.

Barnes & Noble jumped 11 percent to $15.06 at the close in New York for the biggest one-day gain since Oct. 31. The shares had increased 9.1 percent in the 12 months through Feb. 22, compared with a 12 percent increase for the Standard & Poor’s 500 Index.

The price would be negotiated with the board, and the buyout would be funded primarily with cash, Riggio said today in a filing with the U.S. Securities and Exchange Commission. The proposal would exclude Barnes & Noble’s Nook and college businesses, he said. Riggio, the company’s largest holder with about 30 percent of the stock, declined to comment beyond the filing, according to a company spokeswoman.

If successful, Riggio would leave a public company composed of a college unit that runs bookstores for universities and a digital division that sells tablets and digital content. In October, the company placed the units in a subsidiary called Nook Media. Even with the college division’s profit, that combination had an operating loss of about $138 million in the three quarters through Oct. 27 because of the high costs of building Nook devices.

Lowered Nook Forecast

The company also lowered expectations for its new subsidiary earlier this month when it said operating losses will be wider for Nook Media in the fiscal year ending in April and sales wouldn’t reach a previous forecast of $3 billion. Barnes & Noble is scheduled to report third-quarter results on Feb. 28.

Meanwhile, Barnes & Noble has been fighting to reverse two years of net losses as readers spend less at stores and transition to digital books. The company has been sacrificing profits to invest in building e-readers and tablets to gain a foothold in the e-book market.

While it has made headway on the digital front, revenue from the Nook division, which includes devices, accessories and content, fell 13 percent to $311 million during the holiday shopping season amid increased competition from devices from Inc. and Apple Inc. Sales slid at its stores during that period too.

Barnes & Noble confirmed it had received notice of Riggio’s intentions and said in a statement today that a committee of independent directors David G. Golden, David A. Wilson and Patricia L. Higgins will oversee the evaluation of the proposal and the negotiation of any transaction.

Peter J. Solomon

Riggio, 71, told the board of his interest without starting a formal process, a person familiar with the matter told Bloomberg yesterday. Riggio is working with boutique investment bank Peter J. Solomon Co., said the person, who asked not to be identified because the matter was private.

“He knows the book business like the back of his hand,” David Strasser, an analyst with Janney Montgomery Scott LLC in New York, said in an e-mail today. Barnes & Noble “could be a private company with cash flows. Turns out lots of people like books still. Nook is tougher and needs funding. E-readers have also hit a kind of wall at current penetration.”

Strasser recommends buying the shares.

The move comes after the company said in January 2012 that it would explore ways to unlock the value of the Nook. In March, the company hired Michael Huseby, who had experience spinning off companies at Cablevision Systems Corp., as chief financial officer.

Microsoft Investment

In April, Microsoft Corp. announced a $300 million investment in a new subsidiary, later dubbed Nook Media, that combined the tablet and digital content unit with a chain of college bookstores.

Microsoft’s 18 percent stake valued Nook Media at $1.7 billion. Publisher Pearson Plc then announced an investment of $89.5 million on Dec. 28 in the unit, which gave Nook Media a valuation of $1.79 billion.

Barnes & Noble’s 689 consumer bookstores generated $996 million in sales during the quarter ended in Oct. 27. The collegiate unit had $773 million in sales during the quarter, while the Nook-making technology unit posted $160 million in revenue.

The bookstore business may be valued at about $484.5 million, David Schick, an analyst with Stifel Financial Corp. in Baltimore, estimated in a note to clients today. The entire company may be worth roughly $2.3 billion, he said.

Barnes & Noble is scheduled to report fiscal third-quarter results on Feb. 28.

Riggio opened the Student Book Exchange in Manhattan’s Greenwich Village in 1965 and acquired Barnes & Noble’s name and flagship bookstore in the 1970s, according to the company’s website.

Evercore Partners Inc. is serving as the board committee’s financial adviser, and Paul, Weiss, Rifkind, Wharton & Garrison LLP is providing legal advice, Barnes & Noble said.

Before it's here, it's on the Bloomberg Terminal.