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Liberty’s bid for Barnes & Noble may not be entirely financial

Over the weekend John Malone’s Liberty Media owned Liberty Capital pounced on Barnes and Noble, the financially stressed book store group, which has p

By PETER WHITE

Published: 26 May, 2011

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Over the weekend John Malone’s Liberty Media owned Liberty Capital pounced on Barnes and Noble, the financially stressed book store group, which has put itself up for sale. The bid offer ludicrously values B&N at just $1 billion, but that’s been the going rate for anyone that has considered bidding for it – despite its sales running at $2.3 billion for the last quarter. A more likely stock market value if the company had positive cash flow would be $6 billion or $8 billion, less debt.

The problem is that B&N is juggling its finances in order to try to stay alive, and has just exchanged on a $1 billion credit facility which will reduce financing costs by around $10 million a year. Every penny seems to count, but everyone who is watching the company sees it as more valuable once it is out of trouble, and especially in light of its Nook Color ebook reader strategy.

In February, Barnes & Noble reported total sales of $2.3 billion for its fiscal third quarter 2011, a 7% increase compared to the same quarter of 2010. Bookstore sales for the quarter were up 7%, but Barnes and Noble.com online ebook sales were up some 64%. It is expected that B&N could become a serious alternative to Amazon and Apple in the online book market, as long as it can survive, and can partner outside of the US.

Interestingly this offer from Liberty Media is contingent on the chairman and founder Leonard Riggio staying onboard and keeping his minority holding. This sounds very much as if it is a genuine white knight offer, designed to make money for Malone and rid Riggio of corporate raiders which have hounded the stock for the past few years. If Riggio keeps all his shares, then Liberty will own 70% of the company.

Ever since 2008 B&N has been harassed by the corporate venturer Ronald Burkle through a group called the Yucaipa Funds, which has been built a stock position in an attempt to take the company over. In the end B&N chose to adopt a poison pill defense which expires in 2012, which keeps the Yucaipa holding under 20%. Yucaipa was buying in an environment where B&N valued at way under $1 billion.

Burkle says clearly that he wants to seek mergers and eliminate assets to get shareholder benefit out of B&N. Back in December hedge fund entrepreneur

William Ackman and his investment fund Pershing Square Capital Management, which has built a 38% position in Borders, offered to buy out B&N and merge it with Borders at $16 a share. That offer has simply gone quiet and perhaps was never formally made and the money was simply piled into Borders to get the capital into it. That deal was also supposed to leave Leonard Riggio, who bought the company back in 1971, in the management seat, with his stock intact.

A merged Borders and B&N would have almost $10 billion in revenues with Borders contributing $2 billion of that, plus 679 US stores and B&N closing in on $8 billion with 717 retails stores and 633 college based book stores. While that might add buying power, it does little to accelerate the transition from physical book stores to an electronic giant. It simply doubles the size of the retail problem, the diminishing side of the business, potentially tying to bricks together and asking “Now can they float.” Amazon, by comparison, is on track for a $30 billion year and hasn’t got a single shop.

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