The spring is a good time of year. Everything feels fresh and new, while all sorts of seeds that have fallen into the soil start to grow. It's a time for companies that made changes last year to finally show what good plans they have, and how they're going to make the most of this new world. With that in mind, I have three big merger/spinoff stories that I'm following, which I hope to see some action from in the spring. Whether it's proving that the new brand is going to make money, or realizing that an old brand needs to be set free, these three companies all have something to prove this year.
The end of the e-reader
Let's start from the most important move to be on the lookout for. This one is all about bringing a company back to life, with a jolt of freedom and income when it most needs it. Of course, I'm talking about Barnes & Noble's (BKS) potential to spin off its Nook division into a separate company. Microsoft and Pearson have already bought into the Nook at a cost of $300 million and $90 million, respectively. Based on the percentage of the company purchased most recently, Nook has an implied value of $1.8 billion. That's about a billion dollars more than Barnes & Noble is currently valued at as a whole company.
Spinning the Nook off would mean two things. First, it would mean the Nook business could generate some much-needed capital. The e-reader is fighting a battle against Amazon.com's Kindle, and things aren't looking good for the Nook. Part of the problem is that the company isn't spending what it needs to on advertising and marketing, because it's strapped for cash. Last quarter, the Nook brought in a pre-tax loss of $51 million. At the same time, the combined retail and college businesses brought in $116 million in profit, pre-tax.
Which brings us to the second reason to split the business up: The Nook is dragging down the retail business. Right now, it's supplying the cash that the Nook is burning through, which means that it can't invest in itself. If the two companies split, the retail side could take off. I'm looking for this to happen in early 2013, so that the Nook business has plenty of time to use its new freedom to gear up for the holidays.
The season for iced tea
The next new business I want to see a move from in the spring is Starbucks' (SBUX -1.02%) Teavana brand. The company acquired the tea retailer on the very first day of its current fiscal year for $620 million. The company has said that one of the first moves it will make is to expand beyond Teavana's usual footprint inside malls. As a first step, I'm looking for Starbucks to keep its pledge to open standalone locations early in 2013.
As an investor, I'd want to see Teavana contributing at least the promised $0.01 in earnings per share this year, and hopefully much more. Tea has long been the key to grabbing non-coffee drinkers, and Starbucks' sluggish work in Europe could get a boost from a solid tea offering. The internal hopes for the brand are certainly high, with CEO Howard Schultz saying the company believes "the tea category is ripe for reinvention and rapid growth." He added: "The Teavana acquisition now positions [Starbucks] to disrupt and lead, just as [it] did with espresso starting three decades ago."
There is a difficult balance to strike, with the company expanding the brand without sinking a fortune into it. Having said that, I'm looking for the first dozen or more new shops to be open before the end of the spring, with changes appearing in Starbucks' retail locations as well.
Picking up the surf slack
The final new brand is one that actually hasn't happened yet. VF (VFC -2.85%) recently announced a bid for Billabong, which is contingent on a number of steps, the first being a look into Billabong's books. First the good news: The $556 million acquisition would add another excellent brand to VF's portfolio and would give the company all sorts of new venues to sell its Reef brand merchandise. While Billabong's business is close to evenly split between retail and wholesale -- retail accounts for 46% of revenue -- its retail operation has been weak recently. VF is the perfect company to change that situation.
The bad news is that Billabong has watched other bids surf off into the sunset recently, as more information about the company's working were revealed. Just last year, there was interest from at least three other companies, all of which backed out on the deal. So for VF and Billabong, I'm just looking for a resolution to this proposed deal in the spring. I don't need a miracle, just a signed contract.
