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Barnes and Noble may have a White Knight in its battle for a digital future

Back when one of us worked at Dun and Bradstreet, the term negative net worth was deemed to be very, very bad

By PETER WHITE

Published: 9 December, 2010

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Back when one of us worked at Dun and Bradstreet, the term negative net worth was deemed to be very, very bad. So when you pass your eye over the balance sheet of both Barnes and Noble, the biggest book store in the US, and its rival the Borders Group, the combination of low net worth (assets less liabilities), the fact that some of the assets are still ephemeral (goodwill) and that the results of both are largely cash negative, makes it easy to understand why both of them are valued at such lowly levels on the US stock market.

But when companies like these, with brands that are inherently valuable, begin to have a potential upside in the digital future, then both begin to take on a value that can only be appreciated by adventurer investors. This week we can see that the two organizations have perhaps found their white knight and are launching plans, visible only in the fine print of SEC filings for Borders, to take the sudden increase in sales at Barnes and Noble and the heightened interest in its digital strategy, as depicted by the arrival of the NookColor, and its effrontery to take on Apple’s iPad tablet at half its price, and turn it all into far higher share prices.

Ever since 2008 Barnes and Noble (B&N) has been harassed by the corporate adventurer Ronald Burkle through a group called the Yucaipa Funds. It has built a stock position that has forced the company to adopt a poison pill, set to expire during 2012, to keep the Yucaipa holding under 20% of the group. Yucaipa was buying in an environment that sees B&N valued at under $1 billion, but with revenues heading for $6 billion, and growing at 43% over the first half of its current financial year to around $3.3 billion.

While Burkle says it wants to seek mergers and eliminate assets, there really is only one way to get shareholder benefit out of B&N, and that’s to continue to trade it under that brand and make the most of the Nook strategy. That could mean staying as it is or merging it and to do that someone has to put up some cash.

Now another corporate adventurer in the name of young hedge fund entrepreneur

William Ackman, and his investment fund Pershing Square Capital Management, which has already built a 38% position in Borders, has offered to buy out B&N and merge it with Borders for $16 a share. That offer has not yet been formally made and what happened this week is that the paperwork was being done on buying more shares in Borders for the purposes of putting in $1 billion ready to make an offer. The offer is described as “mutually acceptable” so Ackman is only interested in being a white knight, and will not try to bully B&N, and anyway the poison pill would apply equally to him as it does currently to Buckle.

The deal that it plans to put on the table will allow shareholders to take stock or cash, which could mean that the powerful backer of B&N, Leonard Riggio, who bought the company back in 1971, could opt to keep his stock in the combined entity, while giving Buckle a chance to cut his losses and leave with a profit.

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