Is Barnes & Noble, Inc. a Screaming Buy After G Asset Management's Offer?

In response to G Asset Management's partial buyout offer, shares of the world's largest publicly traded bookstore rose significantly. Is this a sign of better times ahead or is the market getting ahead of itself?

Feb 24, 2014 at 5:30PM

Barnes

Source: Wikimedia Commons. 

Right now, shareholders of Barnes & Noble (NYSE:BKS) are probably very happy. After news broke that G Asset Management, a value-oriented firm that focuses mostly on private investment deals, offered to acquire a majority stake in the struggling bookseller on Feb. 21, shares of the company jumped more than 8%. Given this new development, should the Foolish investor consider jumping into the fray or is now a prime time to cash out?

Barnes & Noble on the ropes
Over the past couple years, times have been tough for Barnes & Noble. Despite revenue climbing 23% from $5.8 billion in 2010 to $7.1 billion by the end of 2012, sales fell 4% to $6.8 billion in 2013. The primary driver behind its ascent, and subsequent decline, was the initial success, then sudden collapse of the NOOK.

Between 2010 and 2012, the company's NOOK segment grew revenue from $105.4 million to $933.5 million as e-book-hungry consumers gobbled up the device. But in the face of competition from Amazon.com's Kindle and Apple's iPad, the segment's revenue fell 16% to $780.4 million by the end of its 2013 fiscal year.

Bks Segment Data

Source: SEC Edgar Database. 

From a profitability perspective, the company's foray into e-readers had a drastic negative side effect. In 2013 alone, the operating loss in its NOOK segment amounted to $511.8 million. This eclipsed the aggregate operating income of the company's retail and college segments of $291.8 million, and was nearly double the operating loss the NOOK segment experienced a year earlier.

But things are looking up!
In light of these troubles, management announced that it was reducing the size of its NOOK segment staff. At first, headlines claimed that the company was getting rid of its entire staff in the segment, which turned out to be false. Regardless, the company needs to do something to stop the bleeding.

Fortunately, G Asset Management thinks it has a solution. Believing that the company's business is fundamentally sound, absent the NOOK segment, the investment firm released a statement in which it offered to acquire 51% of the bookseller for $22 per share. This represents a substantial premium to the $16.78 the company's shares closed at a day earlier.

Another alternative, according to sources, is for the investment firm to buy 51% of the company's NOOK segment in a deal that would value it at $5 per share. This would place a value on the segment of around $300 million and imply a value on the rest of the business at $760 million.

But this doesn't mean things will improve!
Based on G Asset Management's strategic offer, you'd think the company's situation would improve. While that's certainly a possibility, it's not a guarantee. For proof, let's look at another troubled company that has received a large institutional investment.

After posting lackluster results for a few years, J.C. Penney (NYSE:JCP) CEO, Mike Ullman, was pushed out and a new replacement, Ron Johnson, stepped in. The decision to bring on Johnson as CEO has been attributed to Bill Ackman, the founder of Pershing Square Capital.

Recognizing that J.C. Penney could represent an attractive turnaround, Ackman bought 39.1 million shares at an average price of $25 and pushed to replace Ullman and install someone with a different perspective on how to lead the company. As part of Johnson's initiative to reinvent the retailer, he slashed coupon sales and began offering everyday low prices.

In response to his changes, consumers became disenfranchised and the company's revenue declined a whopping 25% from $17.3 billion to $13 billion. Over this same timeframe, J.C. Penney's net loss ballooned from $152 million to $985 million as impairment charges and higher costs plagued the business. Realizing that the turnaround attempt was failing, Johnson was replaced by his predecessor, and Ackman sold his stake at a roughly 50% loss. He also resigned from the company's board of directors.

Foolish takeaway
Currently, shareholders appear to be optimistic about G Asset Management's proposal to buy a majority stake in either Barnes & Noble or its NOOK segment. With the ability to control the company's operations, it's possible the business could return to profitability. However, the tale of J.C. Penney should serve as a cautionary note that large shareholders aren't always capable of turning around companies.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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