Liberty Media Sees More Than Just Bookstores In Barnes & Noble
May 20 2011 - 3:28PM
Dow Jones News
Liberty Media Corp.'s (LCAPA, LINTA, LSTZA) bid for Barnes &
Noble Inc. (BKS) could open a new chapter for the media
conglomerate in the bookstore business, a departure from its heavy
concentration on television and e-commerce investments.
The deal, which values Barnes & Noble at $1.02 billion, also
would be consistent with the modus operandi of Liberty's chairman
and controlling shareholder, John Malone, who has made a fortune,
in part, by investing in companies left for dead by many investors,
only to prove they have life left. In this case, Barnes &
Noble's key lifeline would be its electronic reader, the Nook, and
the growing electronic-book market.
However, the offer also seems to lack some key attributes that
Liberty is known for pursuing in an acquisition target, namely
substantial tax assets or healthy cash flows. Citigroup Investment
Research estimates Barnes & Noble's annual free cash flow at
just $65 million a year. The deal's critics also point to the
decline in the traditional book business.
Nonetheless, the bid certainly has energized Barnes &
Noble's stock, which has surged more than 30% Friday to $18.45,
above the bid's per-share value of $17.
The jump in stock price is likely due to the scrambling done by
investors who had been betting that Barnes & Noble's stock
would fall. More than half of Barnes & Noble's float was sold
short, meaning those shares produce profits when the stock price
falls. Also propping up the stock may be the hope that Liberty
would raise its offer.
Liberty representatives couldn't be reached for further comment
Friday, and Barnes & Noble declined to comment beyond its own
press release. Barnes & Noble, under pressure from dissident
shareholder Ron Burkle's Yucaipa Cos., put itself up for sale in
August but reported no progress in attracting a suitor until
Thursday evening.
In a press release Thursday, Liberty expressed confidence in the
bookseller's management team and said the company is the
"established leader in bookselling and is at the forefront of the
transition to digital." The offer, which also includes the
assumption of about $450 million in debt, would give the Liberty
Capital group a 70% stake in the company, while Barnes & Noble
founder Leonard Riggio would retain his 30% stake and remain at the
company.
However, with the bookstore business facing tough pressure from
the rise of online retailing and electronic book selling, observers
were baffled by Liberty's move. Citigroup said the deal's
"immediate financial merits seem limited." The firm pinned
Liberty's long-term strategic rationale on a potential merger with
smaller rival Borders Group, which filed for bankruptcy in
February, or on the possible alliances with Liberty's various media
and e-commerce assets.
Barnes & Noble's core bookstore business is considered less
of a focus than its digital business. E-books are a $1 billion
business in the U.S. and on pace to nearly triple year-over-year,
Stifel Nicolaus said Friday, citing a Publishers Weekly article
from last month. Barnes said the Nook reader is its best-selling
product in its history, and rival Amazon.com Inc. (AMZN) said
Thursday that sales of e-books on its website have now surpassed
combined sales of hardcover and paperback books.
Barnes & Noble has plowed all of its cash flow, and then
some, into its Nook brand of electronic-book readers to capture a
quarter or more of a burgeoning e-book market, where Amazon's
Kindle dominates most of the remaining share. Barnes recently
suspended its once-lofty dividend to free up more money to invest
in digital strategies.
Liberty may see an opportunity to bolster its foothold in the
fast-growing e-book market and can add much-needed financial
support to Barnes & Noble's position.
Malone, credited as a founding father of the cable TV business,
is known as a savvy investor and tough dealmaker who has cobbled
together a patchwork of businesses under the banner of his Liberty
Media empire, including home shopping network QVC and premium cable
network owner Starz Entertainment. His company rescued satellite
radio giant Sirius XM Radio Inc. (SIRI) from bankruptcy with a $530
million investment in 2009 that is now valued at $3.5 billion.
Jeffrey Wlodarczak, analyst with Pivotal Research Group, said in
Liberty's view, Barnes & Noble "essentially operates a monopoly
business that may decline at a slower rate than anticipated by the
market, with upside if the Nook, and related Internet businesses
continue to generate strong growth, and they can improve
operational efficiencies."
For its fiscal third quarter ended in late January, Barnes &
Noble reported $170 million in earnings before interest, taxes,
depreciation and amortization. The company recently suspended
guidance but said in November it expected between $170 million and
$205 million in Ebitda for the fiscal year, and the company set a
goal last summer to achieve $500 million in annual Ebitda by 2014.
That's roughly equal to the $500 million in cash Liberty said it
would likely contribute to the deal.
By 2013, Barnes & Noble's website alone should generate
annual revenues of $2.3 billion and produce profits of $95 million,
Janney Capital Markets predicted in a note early this month.
-By Nat Worden, Dow Jones Newswires; 212-416-2472;
nat.worden@dowjones.com; and Maxwell Murphy, 212-416-2171;
maxwell.murphy@dowjones.com
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