Dealtalk: Barnes & Noble auction gets case of writer's block

NEW YORK Mon Mar 7, 2011 11:28am EST

A girl reads in an aisle at a Barnes and Noble bookstore in Falls Church, Virginia, August 24, 2010. REUTERS/Kevin Lamarque

A girl reads in an aisle at a Barnes and Noble bookstore in Falls Church, Virginia, August 24, 2010.

Credit: Reuters/Kevin Lamarque

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NEW YORK (Reuters) - Barnes & Noble Inc's (BKS.N) efforts to find a buyer have slowed to a crawl, erasing recent gains in its stock price, as potential suitors question the bookseller's ability to compete against formidable rivals.

Barnes & Noble is trying to reinvent itself and has a winner with its Nook e-reader. Its largest direct rival, bankrupt Borders Group Inc BGPIQ.PK, is shrinking by half. Yet the company's stock has fallen below $12, less than where it was when the company put itself up for sale in August.

The hope of a takeover had lifted the struggling chain's shares as much as 47 percent. But they have since lost all those gains as a bidder has so far failed to emerge for the challenging auction.

"The stock price isn't the draw or the deterrent. There's no strategic (bidder) out there that would want them. They could appeal to private equity, but there's been no rabid interest so far," said one retail investment banker who declined to be named.

A Barnes & Noble spokeswoman declined to comment on the sales process other than to say it is "ongoing."

Barnes & Noble's founder, chairman and top shareholder Leonard Riggio, has said he would consider taking the company private with partners. He owns 29.7 percent of the company.

But Riggio, who survived a proxy fight waged last year by second largest shareholder, Ron Burkle's Yucaipa Cos, over corporate governance issues, could be a deterrent to some buyers, one analyst said.

"It's likely that investors are just coming to terms with the fact that Leonard Riggio is unlikely to cede power," Standard & Poor's retail analyst Mike Souers said.

"Unless it's a private takeover led by him, it's unlikely to happen."

Barnes & Noble shares fell to $11.60 in morning trading on Monday, hitting a 2-1/2-year low. They closed at $18.69 on February 15.

EXPENSIVE REINVENTION

Barnes & Noble remains heavily reliant on traditional, bricks and mortar bookselling at its 705 superstores, the same business model that failed at Borders.

So Barnes & Noble has bet its future on the Nook and its ability to generate e-book sales.

But that promises to be expensive against deep-pocketed rivals Amazon.com Inc (AMZN.O) and Apple Corp (AAPL.O).

It's an open question whether the stores, which face a longtime book sales decline, can generate enough cash to help fund the main prong of Barnes & Noble's growth strategy: the Nook and the e-books sales it generates.

"It's not only 'how do you compete with iPad 2' on the digital side, but does the bricks and mortar have enough legs to support the growth of the digital platform," said Morningstar analyst Peter Wahlstrom.

Barnes & Noble last month suspended its dividend to help fund the develop of the Nook, sending shares plummeting as funds that invest in dividend-paying stocks dumped the stock. It also reported a lower than expected holiday quarter profit.

Barnes & Noble has said it will spend $150 million on Nook's development this fiscal year. And those costs will eat into profits for quite some time, analysts warned.

"The investments will continue for the foreseeable future. Combined with declines in physical books, that should continue to pressure earnings," said Credit Suisse analyst Gary Balter in a research note last week.

Nook, launched in 2009, is the second best-selling e-reader behind Amazon's Kindle, according to Forrester Research. And Barnes & Noble Chief Executive William Lynch claimed last month that his company has a 25 percent share of the e-books market.

That makes the Nook the chain's most attractive asset for prospective suitors and its best hope for having better luck than Borders did.

Borders, which filed for bankruptcy protection last month, put itself up for sale in 2008. But it never found any takers.

(Reporting by Phil Wahba and Jessica Hall, editing by Dave Zimmerman)

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