Barnes & Noble draws interest, but a tough sell

NEW YORK (Reuters) - Like a dog-eared paperback in the discount bin, Barnes & Noble Inc BKS.N may prove to be a tough sell.

The world’s biggest bookstore chain is suffering from a chronic decline in sales and shrinking cash flow that could put off new financial partners.

Barnes & Noble said on Tuesday it was reviewing strategic alternatives, including a possible sale.

Founder and top shareholder Leonard Riggio, whose family has run the company as its business waned, wants partners for a bid. But he has yet to get backers, according to a source familiar with the matter.

A number of private equity firms are interested in taking a look at the bookseller, including names such as Bain Capital, Apollo Management LP APOLO.UL, TPG Capital LP TPG.UL and others, sources familiar with the matter told Reuters. But how their interest might be reconciled with Riggio's 29.9 percent stake was unclear.

Further complicating the picture, billionaire investor Ron Burkle holds more than 19 percent of the company and has made it clear in regulatory filings and a lawsuit that he believes Barnes & Noble has been mismanaged.

Burkle accumulated much of his stake when the company’s shares traded in a range of $19 to $22, including a purchase as recently as May.

The shares closed on Wednesday at $15.31, including a 19 percent surge on news of the possible sale, suggesting buying Burkle’s position would be pricey.

On the flip side, should Burkle want to pursue control, he will have a hard time convincing Riggio to step aside.

“I don’t think there is going to be whole lot of interest aside from perhaps Burkle or Riggio. It could be the two of them bidding against each other,” said Standard & Poor’s Michael Souers. “Riggio is too attached to this business to want to sell out.”

One retail investment banker described the nascent auction as a party where no one will show up. It could well suffer the same fate as rival Borders Group Inc BGP.N, which explored a sale in March 2008, but abandoned the process later that year.


Prospective buyers will also find it hard to assess Barnes & Noble’s future prospects. Its 720 bookstores have suffered as readers buy more of their books online, or in electronic form.

With a market value of about $900 million, Barnes & Noble is dwarfed by competition such as Inc AMZN.O, which has a market value of about $57 billion.

Industry watchers say Barnes & Noble's brand remains strong and has a place in the bookselling industry among online giants such as and Apple Inc AAPL.O. But an expensive attempt to compete with their fast-selling electronic readers with its Nook device will give many investors pause.

“They still have a sizable business -- they are the world’s largest physical bookseller and that business probably has a very long tail,” said Morningstar analyst Peter Wahlstrom.

Barnes & Noble has managed to quickly garner a 20 percent share of the e-books market and expects online sales to rise 75 percent to $1 billion this fiscal year.

Paradoxically, success on the e-books front could cannibalize its total sales and profits, given the lower margins on e-books and fierce competition.

Sales at Barnes & Noble’s stores open at least a year fell 3.1 percent last quarter and are only expected to rise marginally this year. Net cash flows from operations have dwindled to about $128 million at the end of its fiscal year 2010, down from $429 million in its fiscal 2007.

Company shares have tumbled in the last year from about


Wall Street analysts also warn it will be hard for buyers to justify a sizable premium to attract investors. Several said the $13 that shares were trading at in the days before the announcement on Tuesday reflected Barnes & Noble’s intrinsic value.

“There’s a pretty wide range at this point and it depends on your outlook,” Wahlstrom said.

The shares could be worth more than $20 if one assumes Barnes & Noble’s digital books strategy works and physical sales do not decline too much.

On the other hand, the price could fall into single digits if Apple and Amazon build on their market share and if stores become obsolete, he said.

A further drain on the company is last year’s acquisition of Barnes & Noble College Booksellers, a chain of 637 on-campus stores from Riggio for $514 million, despite the fact students are buying more of their textbooks in digital form.

Burkle pointed to the deal as an example of the chain’s poor corporate governance.

But both prospective rivals agree on one thing -- they see Barnes & Noble shares as grossly undervalued.

“Burkle may just have a different method of trying to unlock that value, but they’re both trying to get shares to appreciate,” Wahlstrom added.

Reporting by Phil Wahba, Jessica Hall and Megan Davies; editing by Michele Gershberg and Andre Grenon