Barnes & Noble Stores Seen Topping Market Value: Real M&A

For Barnes & Noble Inc. founder Leonard Riggio to take his bookstores private, he may need to write a check for more than the entire company’s market value.

Riggio said yesterday that he will offer to buy the retail stores and website of the New York-based company he started more than 40 years ago, leaving shareholders with Barnes & Noble’s college book and Nook e-reader businesses. The retail chain alone is worth about $1 billion, according to the average of four analysts’ estimates compiled by Bloomberg, more than Barnes & Noble’s market capitalization yesterday of $902 million.

Buying the bookstores would give Riggio the most profitable piece of a company that throws off more cash relative to its share price than 94 percent of North American specialty retailers, according to data compiled by Bloomberg. Barnes & Noble has been dragged down by concerns over the value of Nook, which continues to lose money despite investments from Microsoft Corp. and Pearson Plc, Credit Suisse Group AG said.

“This is the catalyst we had been expecting for a long time to unlock the value of Barnes & Noble,” Albert Saporta, managing director of AIM&R, a Geneva-based alternative investment research firm, said in an e-mail. The chain “can be run profitably as a private company.”

Riggio, Barnes & Noble’s largest shareholder with about 30 percent of the stock, said yesterday in a filing that the price for the retail business will be negotiated with the board.

Bookstore Value

The stores and website may be valued at $700 million to $1.2 billion, according to a range of estimates from analysts at AIM&R, Janney Montgomery Scott LLC, Maxim Group LLC and Credit Suisse. The average estimate is about $1 billion.

Mary Ellen Keating, a spokeswoman for Barnes & Noble, declined to comment on a potential bid price or valuation of the company’s retail assets.

A deal would come as the stock trades at an 88 percent discount to its revenue for the past 12 months, even after climbing yesterday by the most in four months, data compiled by Bloomberg show. That’s the second-cheapest among North American specialty retailers larger than $500 million, which fetch a median ratio of 1.1. Barnes & Noble also had cash from operations in the past year equal to about 11 percent of its stock price, while the industry’s median free cash flow yield is less than half that level, the data show.

“It’s extraordinarily cheap,” John Tinker, a New York-based analyst for Maxim Group, said in a phone interview. Barnes & Noble “is a slowly melting ice cube and one that could be repositioned.”

Small Premium

Tinker values the bookstores at $990 million, or almost $14 a share using what he calls conservative estimates for cash flow. That’s just 2.4 percent higher than the stock’s average price in the last 20 days. The shares ended yesterday at $15.06.

Today, the stock rose 2.7 percent to $15.46, ending at its highest closing level in more than two months.

Barnes & Noble has been sacrificing profits to invest in its Nook Media business, while battling declining sales as readers spent less at stores and transitioned to digital books. Selling the retail chain and website would leave investors with just Nook Media, which may have losses of close to $300 million this year, according to Credit Suisse.

“The issue for investors is not whether there is more value than the stock price in Barnes & Noble bookstores,” Gary Balter, a New York-based analyst at Credit Suisse, said in a note to clients yesterday. “That is an easy yes. The issue is whether there is positive value in the money-losing and increasingly poorly positioned Nook Media division.”

Liberty Stake

Billionaire John Malone’s Liberty Media Corp. invested $204 million in Barnes & Noble in August 2011, allowing the company to spend more on its Nook e-readers to keep up with competitors. The deal gave Liberty Media preferred shares that are convertible into 12 million common shares at $17 apiece and voting rights.

With $2.8 billion in cash and no debt, Liberty Media could back Riggio in taking the bookstores private and may have a strategic interest in doing so, Maxim Group’s Tinker said. Malone is also chairman of Liberty Interactive Corp., which owns the QVC home-shopping television network. Almost half of QVC’s sales now come from its website and Malone could seek to partner it with Barnes & Noble should it want a retail presence quickly, according to Tinker.

Courtnee Ulrich, a spokeswoman for Liberty Media, didn’t respond to requests for comment.

Nook Future

“Riggio will win it, with Liberty’s backing,” he said. “This is someone who has played the game extremely well and who might be backed by the smartest financial engineers in the business -- Liberty. The question then becomes, what does Nook trade for on a standalone basis?”

The Nook business would need to reconsider its strategy because investing that heavily in its own devices won’t be sustainable without the profits from the bookstore operations, according to Peter Wahlstrom, an analyst at Morningstar Inc. in Chicago. That could be a good thing, he said.

“I view this as a positive,” Wahlstrom said in a phone interview.

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