Top bookstores' gloomy views generate merger buzz

By Anupreeta Das and Jessica Wohl

NEW YORK/CHICAGO (Reuters) - Top U.S. booksellers Barnes & Noble Inc. and Borders Group Inc. provided lackluster financial outlooks on Thursday, leading some industry analysts to think that a merger or leveraged buyout could be in the offing.

Even the prospect of a new blockbuster Harry Potter book -- slated for release this summer -- failed to charm investors as shares of both companies headed lower in Thursday midday action.

But with so many mergers and acquisitions across the equity landscape, some industry analysts see the book-selling business as ripe for the picking.

Borders (BGP.N) said it would close nearly half of its Waldenbooks stores, weigh options for its international units and start selling books through its own Web site -- ending its arrangement with Amazon.com Inc. (AMZN.O)

The company, which also posted a quarterly loss, said it would focus on its U.S. superstores. Its shares fell 1 percent to $21.20 in Thursday midday trade.

"The restructuring plan is consistent with our expectation, although the pursuit of alternatives for international is happening faster than we expected," said Goldman Sachs analyst Matthew Fassler in a note to clients. "The lack of near-term financial color could cap the stock near term."

Industry leader Barnes & Noble (BKS.N) posted slightly higher net income for the past quarter but forecast a loss for the current period.

Earlier this month, Barnes & Noble lowered its outlook, saying higher-than-expected enrollment in its discount program had cut into margins. It also attributed its lower earnings forecast to price-cutting on the forthcoming Harry Potter book.

The discount program is designed to capture customer loyalty, Chief Executive Steve Riggio said on an earnings conference call.

Analysts suggested Barnes & Noble -- with a large number of shares owned by the Riggio family -- may be a good leveraged buyout candidate.

"We think the Riggios really may want to and should take the company private," Stifel Nicolaus analyst David Schick wrote in a recent note to clients. "The book business ... is not best run as a public company -- due to softer comps and quirks of release schedules."

Meanwhile, Goldman's Fassler wrote that a merger -- with Barnes & Noble buying out Borders -- would make financial sense but was unlikely.

SHUTTING 'EM DOWN

Borders said it would reduce the size of its struggling Waldenbooks chain to about 300 stores by the end of 2008 from 564 in 2006.

It is also exploring alternatives for its UK, Ireland, Australia and New Zealand superstores and Books etc. chain.