By Jeffrey A. Trachtenberg And Chelsey Dulaney
Microsoft Corp.'s flirtation with Barnes & Noble Inc. has
ended, clearing the way for the largest U.S. bookstore chain to get
on with its plans to split itself into two separate public
companies.
Barnes & Noble said Thursday that it is buying out
Microsoft's 16.8% stake in Nook Media LLC for about $125 million in
cash and common stock.
Microsoft in 2012 agreed to invest $605 million in Barnes &
Noble's Nook digital device and e-book business and its college
bookstore group. The investment included a $300 million equity
stake plus additional investments through 2017.
In return, Barnes & Noble committed to creating e-reading
apps for new computers, phone and tablets powered by Microsoft's
Windows software. Wall Street analysts and investors wondered
whether Microsoft would eventually make a larger commitment to
Barnes & Noble, but that never materialized.
In a statement Thursday, Microsoft said, "As the respective
business strategies of each company evolved, we mutually agreed
that it made sense to terminate the agreement."
Microsoft is taking a loss on its investment, but won't have to
make any further financial commitments. However, It will continue
to have a connection to the Nook digital business; if that
money-losing business is sold in the next three years, Microsoft is
entitled to 22.7% of the proceeds.
Pearson PLC, which took a 5% stake in Nook Media in 2013, has a
right to sell it back to Barnes & Noble for terms similar to
the ones Microsoft received. Pearson has 15 business days to
exercise that option, Barnes & Noble said. A spokesman for
Pearson had no immediate comment.
Barnes & Noble said its separation into two companies--one
consisting of 658 consumer stores and BarnesandNoble.com, and the
other encompassing 714 college bookstores and the Nook digital
business--will happen at the end of August 2015, instead of the
earlier target of March.
"Sorting out Microsoft is an important step," said John Tinker,
an analyst with Maxim Group. He said buying out the software giant
gives Barnes & Noble "more options regarding the future of the
Nook business and the entire company."
Mr. Tinker estimated that Microsoft has put nearly $500 million
into Barnes & Noble and is getting about 25% back, plus a
percentage of any eventual Nook digital sale. "I was surprised that
Microsoft didn't buy all of Barnes & Noble, because it would
have given them a major retail presence overnight," he said.
Microsoft has made a retail push in recent years.
Since the initial deal was struck with Microsoft, circumstances
for both companies have changed. Barnes & Noble slowed work on
its e-reading devices and tablets as sales slumped and laid off
much of the workforce devoted to its Nook devices. In June, it
signed a deal to sell color tablets made by Samsung Electronics Co.
and co-branded with the Nook label.
Meanwhile, Microsoft has moved ahead with its own Windows
tablets and smartphones. Satya Nadella, the company's chief
executive since February, also has sought to focus on Microsoft's
core businesses, jettisoning some ancillary projects.
The disclosure of the Nook Media transaction came as Barnes
& Noble reported results for its second fiscal quarter ended
Nov. 1, posting a profit of $12.3 million, or 12 cents a share,
down from $13.2 million, or 15 cents a share, a year earlier.
Revenue fell 2.7% to $1.69 billion.
As with all retailers, the holiday season will be critical for
the company. Michael Huseby, Barnes & Noble's chief executive,
said sales of its two Samsung tablets weren't quite up to
expectations on Black Friday, but added that the retailer isn't
"pressing the alarm button." He also praised Samsung as a
partner.
Barnes & Noble has sought to inject excitement into its
stores to attract consumers who are increasingly choosing to shop
online. The retailer has gotten more creative with how it organizes
its titles, added new displays and toys, and introduced big-ticket
gifts like beer kits and turntables.
Mr. Tinker said it was a positive sign that the retail store
group showed core comparable-store growth of 0.5% in the November
quarter, a figure that excludes the sale of Nook digital
products.
"What that tells you is that the book business has stabilized
and that the repositioning of the stores with more focus on gifts
and educational toys and games is working," he said.
Still, revenue at the retailer's consumer bookstores fell 3.6%
to $888 million, primarily because of declining sales of Nook
products. Comparable store sales were down 1.5%.
Revenue at the Nook segment, which includes e-books, devices and
accessories, fell 41% to $63.9 million.
Shira Ovide contributed to this article.
Write to Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com
and Chelsey Dulaney at Chelsey.Dulaney@wsj.com
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