Investors Drop Barnes & Noble, Following Liberty Media

Liberty Media exits its investment in Barnes & Noble -- here's what investors need to know

Alex Dumortier
Alex Dumortier, CFA
Apr 3, 2014 at 7:00PM
Markets

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).

Source: Barnes & Noble

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:FWONA) 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.