Why Would Anyone Want to Buy Barnes & Noble?

On the surface, a private investment group offering to buy Barnes & Noble (NYSE: BKS  ) in 2014 makes as much sense as the firm using that money to open a chain of video rental stores.

Book sales -- really the main thing a bookstore does -- have largely moved digital. This already killed Borders Books and it has left Barnes & Noble as a giant Starbucks with an excellent collection of magazines customers can read for free. The stores also have free Wi-Fi and some even have comfortable chairs making them fabulous remote offices.

Unfortunately, since coffee sales and being a cool, comfortable place for students, wannabe writers, and others doesn't really add up to being a business, so it makes sense to question the continuing viability of the Barnes & Noble business model.

Does G Asset know something we don't?

Little-known G Asset Management has offered to buy a controlling interest (51%) in the struggling bookseller. The firm also offered a separate deal where it would buy 51% of the company's reeling Nook tablet and e-reader business.

Little is known about G Asset. The company's website, which looks like it was built with a free website creator tool, only lists one employee -- President and Chief Investment Office Michael Glickstein. According to his bio on the site,  "Prior to founding G Asset Management, Mr. Glickstein's investment experience included a research position at Pequot Capital Management. At Pequot, he was trained as a generalist value investor under a firm principal who also acted as a Co-Portfolio Manager of a distressed mortgage fund." Glickstein has also worked at Mercer Partners and was a research analyst at Goldman Sachs.

"We've always seen tremendous breakup value" in the company, Glickstein told Bloomberg.

By a breakup, Glickstein means separating the struggling Nook business from the struggling bookstore business.

In its statement on the deal, G Asset Management said, as reported by FT.com, it was "extremely confident that if the Nook segment is separated from the profitable retail and college business, substantial shareholder value would be created."
 
How unhealthy is Barnes & Noble?

Barnes & Noble, like many physical retailers, has had a tough time competing with online stores. The bookseller, however, has the added misfortune of having the top Internet retailer -- Amazon.com (NASDAQ: AMZN  ) directly in its space. Though Amazon now sells everything from diapers to electric generators, pasta to lingerie, the company began as a bookstore. In the book space it first damaged traditional retailers by offering lower prices and then it dealt the killing blow of speeding up the transition to digital books with its popular Kindle line.

Barnes & Noble, with its giant stores and enormous overhead, has managed to soldier on and survive where Borders is just a sad memory (or a giant empty space with a faded sign at a local strip mall). For the holiday season, Barnes & Noble's retail division (its stores and BN.com) reported revenue of $1.1 billion, a 6.6% decrease from the same nine-week period a year earlier.

The Nook business was even worse with revenue of $125 million, a decline of 60.5% as compared to a year ago. Worse still was that digital content sales -- a much more profitable segment than device sales -- were $36.5 million for the holiday period, a decline of 27.3% compared to a year ago.

Amazon does not specifically break out the holiday, but the company reported that for the fourth quarter, its net sales increased 20% to $25.59 billion.

"It's a good time to be an Amazon customer. You can now read your Kindle gate-to-gate, get instant on-device tech support via our revolutionary Mayday button, and have packages delivered to your door even on Sundays," said Amazon CEO Jeff Bezos in a press release.

Is the Nook worth saving?

At one point, the Nook seemed like it might be a viable competitor to the Kindle and maybe even an alternative to Apple's (NASDAQ: AAPL  ) iPad. As recently as April 2012, Microsoft (NASDAQ: MSFT  ) invested $300 million in a subsidiary company created by Barnes & Noble to house Nook and its digital text book business. At the time, Microsoft valued the venture at $1.7 billion with its $300 million representing a 17.6% share, according to a press release.

"The shift to digital is putting the world's libraries and newsstands in the palm of every person's hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content," said Andy Lees, then president at Microsoft.

That may be true, but it appears the digital shift may happen without the Nook. In its fourth quarter 2013 financial results, Barnes & Noble announced it was stopping manufacturing Nook tablets, focusing only on e-readers. At the time, the company said it would make Nook tablets through manufacturing partners, but no new models have been released.

The death of the ereader
 
Starting in 2012, sales of ereaders, which had been on a growth curve, began to plummet as all-in-one tablets were taking over.
 
In its latest report on the ereader growth, industry researcher IHS did not have pleasant things to say about the future of stand-alone ereaders. "After spectacular growth in the last few years, the ebook reader market is on an alarmingly precipitous decline, sent reeling by more nimble tablet devices that have gained the ardent patronage of consumers."
 
And while IHS does not predict the ereader market will go away, the research company sees stand-alone readers as a slowing business.

Can a deal even be made?

Given the rough climate it faces it would seem Barnes & Noble should jump on an offer that will pay a premium for 51% of the company. Unfortunately how valid that offer is remains a real question.

"He's got no money," John Tinker, an analyst at Maxim Group, told Bloomberg. "Money talks. Even Carl Icahn has to buy a piece of Apple before he can get breakfast or dinner with Tim Cook."

Next steps for Barnes & Noble

If the deal is not real, Barnes & Noble should continue under the leadership of new CEO Michael Huseby who has only been in place since last summer. Though much work remains, Huseby has shown good instincts in continuing to take advantage of the chain's huge retail footprint to sell more than books. Specialty toy -- while a relatively new category at many Barnes & Noble stores -- has room for growth. There's a certain amount of "I need it now" with toys, especially with the collectible games the chain now sells in many locations.

Huseby should consider spinning Nook off or trying to talk Microsoft into making the Nook tablet a low-priced Windows 8 device. He should also aggressively pursue a strategy to make it easier to browse the shelves in a physical store but order the (less expensive) digital version through a smartphone. Until he does that, the chains stores will for many remain an easy way to browse for purchases to later be made at Amazon.

Barnes & Noble may be on the ropes, but with the right leadership and bold innovation, it could survive -- and maybe even thrive -- without a sale.

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