U.S. stocks were little changed on Thursday, as the benchmark S&P 500 climbed down a bit from yesterday's record high with an 0.1% loss. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) was flat on the day. Meanwhile, shareholders of Barnes & Noble (NYSE:BKS) wish they could say the same – the book retailer's stock fell 13.5% on news that one of its largest investors has sold virtually its entire investment (article follows below picture).
And just when things were going so well... shares of Barnes & Noble have had a terrific run so far this year, up nearly 50% as of yesterday's close, and near their five-year high.That momentum experienced a brutal reversal on Thursday, however, as Barnes & Noble and Liberty Media (NASDAQ:LMCA) announced that the latter has sold all but 10% of its preferred share investment to institutional investors. As part of the sale, Liberty Media president and CEO Greg Maffei will leave the Barnes & Noble board on April 8, the date of the closing.
In August 2011, Liberty Media paid $204 million for Barnes & Noble preferred shares paying a 7.75% dividend after dropping its $17 per-share bid to acquire the company. The preferred shares were convertible into 12 million common shares of Barnes & Noble at $17 per share (at the time, the 12 million shares represented a 17% stake in the company). As part of the investment, Liberty Media also obtained two board seats that were filled by Greg Maffei and Mark Carleton, a senior vice president. Mr. Carleton will remain on the board.
Liberty Media tried to put a positive spin on their exit, with Mr. Maffei explaining that, "by reducing our preferred position and eliminating some of our related rights, Barnes & Noble will gain greater flexibility to accomplish their strategic objective." The preferred shares investment gave Liberty Media a right of veto over any asset sales.
Nevertheless, there is no way to interpret this as anything but a vote of no-confidence with regard to the bookseller's long-term prospects. Otherwise, Liberty Media would presumably see an opportunity in switching its preferred shares for common shares at a conversion price of $17 per share -- seemingly favorable terms with the shares more than $22 (that's where they were before today's announcement, at any rate). As it is, Liberty Media will have done decently on its investment -- the Financial Times' Lex column estimates the rate of return on the preferreds at 12% (although it's far from clear that is adequate compensation for the time and effort involved).
The challenge for Barnes & Noble is its Nook electronic reader division -- which is reportedly what had attracted Liberty Media to the company in the first place. Trying to offer a competing product to the Kindle or the iPad was a complete non-starter, and the Nook has run up hundreds of millions in losses in the process. Despite this, Barnes & Noble's core retail and college bookstores, though a declining business, remains stubbornly profitable. If Barnes & Noble were to resolve its Nook problem, the core business could still have some juice in it. Still that's a big if. Typically, I don't recommend investors bet on turnarounds, and I'm not going to stray from that line here.
Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of Barnes & Noble and Liberty Media. 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.