Barnes & Noble Breakup Seen Unlocking 44% Gain: Real M&A

A breakup of Barnes & Noble Inc. that could boost the bookseller’s value by 44 percent may finally be in the cards.

The largest U.S. bookstore chain last week reinforced speculation that a breakup is probable after its chief executive officer resigned. Michael Huseby, who helped oversee spinoffs at Cablevision Systems Corp., was promoted to president of the $1.1 billion company. Short sellers have reduced bets that the shares will fall, possibly in anticipation of a value-boosting split, Janney Montgomery Scott LLC said.

If separated, Barnes & Noble’s three businesses -- the retail chain, college bookstores and Nook digital business -- should be valued at a combined $25.86 a share compared with yesterday’s close of $17.97, according to the average of four analysts’ estimates compiled by Bloomberg. Leonard Riggio, the chairman and biggest shareholder, says he wants to buy the retail chain. Nook shareholder Microsoft Corp. may want the rest of the unit to keep up with Apple Inc., Maxim Group LLC said. Janney sees Google Inc. as a suitor.

“They need to do something sooner rather than later,” Steven Soranno, a Bethesda, Maryland-based analyst at Calvert Investments Inc., which oversees more than $12 billion and owned Barnes & Noble shares as of June 30, said in a phone interview. “For shareholders, there is a sense of urgency. If they can realize good value from making that right sale, I think that’s better for shareholders.”

Shareholder Pain

Mary Ellen Keating, a spokeswoman for New York-based Barnes & Noble, declined to comment on the company’s plans.

Today, Barnes & Noble shares rose 0.5 percent to $18.05 at 9:53 a.m. in New York.

Shareholders of Barnes & Noble have endured years of pain, with the stock down 62 percent through yesterday from an all-time high of $47.40 in 2006, as online book sales and the success of Inc.’s Kindle e-reader and Apple’s iPad squeezed profits. The same pressure put Borders Group Inc. out of business in 2011.

Barnes & Noble CEO William Lynch quit on July 8 after the company posted three straight annual net losses. When he won the job in 2010, Lynch told Bloomberg News that his appointment showed how important the bookseller’s new focus on digital technology was. This effort has been largely unsuccessful, and Lynch leaving suggests a shift away from that area, said Michael Souers, a New York-based equity analyst at S&P Capital IQ.

The resignation of Lynch, who isn’t being replaced, spurred a 5.4 percent rally in Barnes & Noble’s shares on July 9. That’s a sign investors are optimistic the company will break up, said Los Angeles-based Andrew Berkin, whose $76 million Vericimetry U.S. Small Cap Value Fund owned the retailer’s shares as of March 31.

Unlocking Value

Albert Saporta, the head of research at Makor Capital Ltd. and a managing director at AIM&R, said taking the retail unit unit private and selling off the Nook e-book business is the best way to unlock value at Barnes & Noble. The digital division posted an operating loss of $200 million for the quarter that ended in January, versus earnings of $177 million and $22 million at the retail and college units, respectively.

“The share price does not reflect the real value of the retail business,” he said in a phone interview from Tel Aviv.

Barnes & Noble’s divisions could fetch $25.86 a share in total if separated, according to the average sum-of-the-parts estimate from four analysts compiled by Bloomberg. The estimate from Goldman Sachs Group Inc.’s Matthew Fassler using multiples from prior deals is $19.42. Janney’s David Strasser sees about $20, and Maxim Group’s John Tinker said about $30. The midpoint of the $30-to-$38 range from Albert Fried & Co.’s Sachin Shah is $34.

Chairman’s Interest

Riggio, who acquired the Barnes & Noble brand and flagship Manhattan bookstore in the 1970s, said in February that he plans to offer to purchase the retail chain, which comprises about 675 stores, and related website. The price would be negotiated with the board, and the buyout would be funded primarily with cash, Riggio said Feb. 25 in a filing with the U.S. Securities and Exchange Commission.

As part of the management change announced July 8, Huseby and Mitchell Klipper, the head of the retail chain, report directly to Riggio.

To finish a deal, Riggio could partner with John Malone’s Liberty Media Corp., which bought a Barnes & Noble stake in 2011, or partner with other investors, S&P’s Souers said.

In 2012, Barnes & Noble created a subsidiary, Nook Media, that included the Nook and college bookstores. Microsoft took a stake in the business and Pearson Plc followed later.

Microsoft, Pearson

Calvert’s Soranno said Microsoft might want Nook Media. Maxim Group’s Tinker sees Pearson as a possible suitor for the college stores. Even Google might be interested in all of Nook Media, said Janney’s Strasser.

Representatives for Redmond, Washington-based Microsoft, London-based Pearson, and Mountain View, California-based Google declined to comment.

In June, Barnes & Noble said it would stop making Nook hardware and look for a manufacturing partner. That unit could help Microsoft bulk up its consumer segment, said Tinker, the New York-based analyst at Maxim Group. The segment that runs bookstores on college campuses and sells digital textbooks could appeal to Pearson, an academic publisher, he added.

For Microsoft, “they’ve obviously been experimenting with this type of retail strategy, and they need to figure out if they’re going to copy Apple properly or not,” Tinker said. For Pearson, “you’ve got these college bookstores that could be very valuable as a conduit into universities,” he said.

Short Sellers

A plunge in bets the stock will fall may also indicate changes are ahead for Barnes & Noble. The proportion of shares sold short dropped to a five-year low of 3.7 percent as of June 21 from 2013’s peak of 22 percent in February, according to data compiled by Markit. The figure was 6.2 percent on July 16.

“Fear is out there” among short sellers, Strasser, the Janney analyst, said in a phone interview. “I’ve always been a believer that there’s the potential for at least one transaction to come at any time.”

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