Last week, media conglomerate Liberty Media (NASDAQ: LMCA ) announced that it had sold the vast majority of its stake in bookseller Barnes & Noble (NYSE: BKS ) . With its largest shareholder bailing out, it's not too surprising that Barnes & Noble shares have tumbled in the last few days.
Investors should generally be wary of companies where major shareholders are selling. That's especially true when they may have inside information -- and Liberty Media has held two seats on Barnes & Noble's board.
But Liberty Media's decision to reduce its investment in Barnes & Noble does not necessarily imply a lack of confidence in the company's strategy. As a result, the dip may have created a good buying opportunity.
Liberty Media and Barnes & Noble
When Liberty Media first invested in Barnes & Noble several years ago, it was mainly a bet on the company's ability to compete with Amazon.com (NASDAQ: AMZN ) in the fast-growing e-book market with its Nook line of e-readers.
For a while, that seemed like a good strategy. But in the last year or so, the e-book market's growth has slowed dramatically. Meanwhile, Barnes & Noble has been locked in a costly price war with Amazon.com and other e-reader and tablet manufacturers.
Today, Barnes & Noble's traditional retail and college bookstore business segments are more promising than the Nook business. As a result, Barnes & Noble is now de-emphasizing the Nook business to some extent. This change in strategy made Barnes & Noble more of an outlier in Liberty Media's investment portfolio, which is primarily oriented around digital media.
Liberty Media decides to leave
Barnes & Noble's shifting strategy thus may have been reason enough for Liberty Media to sell. As a result, I beg to differ with my Foolish colleague Alex Dumortier, who wrote last week that "there is no way to interpret this as anything but a vote of no-confidence with regard to the bookseller's long-term prospects."
But there's a second reason why Liberty Media may have been looking to monetize its Barnes & Noble stake. Liberty Media Chairman John Malone has been a vocal proponent of consolidation in the cable TV market. With cable M&A activity heating up, Liberty Media may be looking to free up cash to bid on cable TV assets that could come on the market this year.
The retail business still looks pretty good
Through the first three quarters of its current fiscal year, Barnes & Noble has posted pretax income of $54 million. That came in the face of a Nook segment EBITDA loss of more than $160 million. This is a testament to the continued strength of Barnes & Noble's retail business.
If Barnes & Noble can simply eliminate the red ink from the Nook business, it would be very profitable relative to its market cap of just over $1 billion. To do this, the company has slashed Nook division expenses -- focusing on profitability over growth. Barnes & Noble is also outsourcing production of new Nook-branded tablets so that it will no longer carry the inventory risk associated with building tablets.
To be fair, the retail business is still declining in the face of competition from Amazon.com, but at a very manageable rate. Barnes & Noble expects to close about 20 stores a year over the next decade, which would cut its store count by about 30% excluding college bookstores (or by 15% including the college stores) over that time frame.
If this downsizing rate is enough to maintain Barnes & Noble's retail profit margin -- and so far that seems to be the case -- the company will still have plenty of scale in 10 years. Moreover, between now and then it would generate enough cash to reward shareholders generously through dividends and buybacks.
Foolish final thoughts
Barnes & Noble may not be the right investment for Liberty Media anymore, but it could be a good opportunity today for patient, long-term investors. Barnes & Noble is still losing money at this point, and it needs to complete the rationalization of the Nook business to allow the retail and college segments' earnings to flow down to the bottom line.
But if Barnes & Noble can at least get the Nook business to breakeven in the next year or two, it would allow the rest of the company to shine. I'm adding Barnes & Noble to the list of stocks I'm watching, and if the stock continues to retreat, I plan to put some money to work with this turnaround story.
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