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.

"What we need to do now and have already started to do since I arrived is stop playing defense in an environment where strong offense is required," Borders Chief Executive George Jones, who joined the company in July, said on a call following the results.

Borders had started remodeling stores with expanded cafes and higher-margin stationery products.

The company said it will also be responsible for its own online sales starting in 2008. Borders was late to the Internet game, launching a Web site in September 1998 before linking up with Amazon in 2001.

Hedge fund Pershing Square owns an 11.5 percent stake in Borders. On Thursday, fund manager Bill Ackman said: "We are very supportive of the changes they are making."

BY THE NUMBERS

Borders posted a net loss of $73.6 million, or $1.25 per share, for its fourth quarter, ended on February 3, compared with year-earlier net income of $119.1 million, or $1.78 per share.

Excluding items, it earned $94.8 million, or $1.61 per share, missing the analysts' average forecast of $1.62 per share, according to Reuters Estimates.

Barnes & Noble's net income rose 3 percent to $127 million, or $1.84 per share, in the quarter, from $123 million, or $1.76 per share, a year earlier. Its results included charges of 3 cents per share.

Analysts on average had been expecting a profit of $1.88 per share, according to Reuters Estimates.

The New York-based company had earlier said it expected to earn $1.86 to $1.96 per share.

Revenue increased to $1.88 billion from $1.75 billion, slightly above analysts' estimates of $1.86 billion.

For the first quarter, Barnes & Noble expects a loss of 8 to 12 cents per share, including charges from closing its Memphis distribution center and an ongoing investigation of its stock-option practices.

(Reporting by Anupreeta Das in New York and Jessica Wohl in Chicago)