Barnes & Noble Turns New Page To Consider A Sale
By Michael Rudnick
August 4, 2010
August 4, 2010
The next chapter in Barnes & Noble Inc.’s history could be a take-private as the bookstore chain prepares for
a potential sale.
The New York book retailing giant said Tuesday it hired Lazard to assist with a strategic review that could
include a possible sale after its board determined that its shares are "significantly undervalued."
Leonard Riggio, Barnes & Noble chairman, founder and top shareholder, could be a buyer, having said he
may consider participating in an investor group to acquire the company. Ronald Burkle's Yucaipa Cos. LLC
could also be a buyer. The Los Angeles private equity firm, which has a 19.6% stake, in recent months has
pressed the retailer to abolish the bookstore chain's poison pill and create a level playing field with 29.9%
holder Riggio if it comes down to a proxy fight.
A dearth of logical strategic acquirers suggests that a financial buyer is the likeliest candidate, sources said.
This could include Riggio and co-investors or a private equity firm.
Possible buyers may also include Carlyle Group, Advent International Corp. and Leonard Green & Partners
LP, which all have an eye for retail and "the financial resources to do so," said Tim Shimotakahara, vice
president of investment banking at D.A. Davidson & Co.
Shares of the company jumped about than 19.2% to close Wednesday at $15.31, bringing its market
capitalization to about $901 million.
Barnes & Noble and Yucaipa officials did not return calls.
Barnes & Noble "meets the typical requirements" of a leveraged buyout candidate, said Morningstar Inc.
analyst Peter Wahlstrom. The retailer generates strong free-cash flow and has relatively low leverage,
Wahlstrom said.
The chain generated about $5.8 billion in sales in the fiscal year ended May 2. It hold just more than $500
million in total debt.
What remains to be seen is whether the retailer, which faces stiff competition from Amazon.com Inc. and
Apple Inc. on the digital front, will garner enough interest from private investors to secure a premium to
satisfy shareholders.
Wahlstrom said a private equity buyer might pony up anywhere between $16 and $21 per share based on
the assumption that an investor would add about $1.1 billion in debt and have a required internal rate of
return of 15% to 20%.
Barnes & Noble is headed toward digital delivery, said Wahlstrom, but it's too early to tell how it will
ultimately shake out, with Amazon and Apple in "very well-established positions."
Love Goel, chairman and CEO of GVG Capital Group, a Minnetonka, Minn., private equity firm specializing in
retail, said Barnes & Noble would be a relatively cheap target because its stock has been under pressure
and the business' market share is shrinking.
Goel, who in a different capacity a decade ago advised Barnes & Noble on its online strategy, said that
based on the retailer's roughly $1.2 billion enterprise value, a buyer could grab it for about 4.5 times its
roughly $300 million in trailing 12-month cash flow. That's a "pretty good discount" compared to the roughly
9 times cash flow other retailers of similar size and scale would command, he added.
Meanwhile, brick-and-mortar book selling, which accounted for about 74% of its sales in the recent fiscal
year, "has been flat, if not on the decline over the past couple of years; it is not perceived as the growth
industry it once was," said Wahlstrom.
Barnes & Noble's digital direction was demonstrated by the March 2009 promotion of its president of Barnes
& Noble.com, William Lynch, to CEO. Lynch has stepped up Barnes & Noble's digital strategy with the $15.7
million March 2009 acquisition of e-book retailer Fictionwise. This was followed by the launch of Barnes &
Noble's eBookstore in July 2009 and the October launch of wireless eBook reader Nook, the company's
answer to Amazon.com's Kindle and Apple's iPad.
Barnes & Noble's fiscal 2010 digital and comparable online sales were up 24%, while same-store sales
languished, falling another 4.8% from the prior year's 5.4% decline.
Wahlstrom said that as a privately held company not pressured to make quarterly earnings, Barnes & Noble
"could accelerate its investment in its digital platform and eReader software."
A private buyer could also eliminate the company's $1 per share dividend that would free up about $55
million in cash per year to direct toward that business, he added.
Goel said a buyer could "monetize" key Barnes & Noble assets, namely its 5 million store loyalty program
customers and "the 15 million people who prefer to shop online at BarnesandNoble.com."
Morris, Nichols, Arsht & Tunnell LLP is serving as Barnes & Noble's legal adviser.
a potential sale.
The New York book retailing giant said Tuesday it hired Lazard to assist with a strategic review that could
include a possible sale after its board determined that its shares are "significantly undervalued."
Leonard Riggio, Barnes & Noble chairman, founder and top shareholder, could be a buyer, having said he
may consider participating in an investor group to acquire the company. Ronald Burkle's Yucaipa Cos. LLC
could also be a buyer. The Los Angeles private equity firm, which has a 19.6% stake, in recent months has
pressed the retailer to abolish the bookstore chain's poison pill and create a level playing field with 29.9%
holder Riggio if it comes down to a proxy fight.
A dearth of logical strategic acquirers suggests that a financial buyer is the likeliest candidate, sources said.
This could include Riggio and co-investors or a private equity firm.
Possible buyers may also include Carlyle Group, Advent International Corp. and Leonard Green & Partners
LP, which all have an eye for retail and "the financial resources to do so," said Tim Shimotakahara, vice
president of investment banking at D.A. Davidson & Co.
Shares of the company jumped about than 19.2% to close Wednesday at $15.31, bringing its market
capitalization to about $901 million.
Barnes & Noble and Yucaipa officials did not return calls.
Barnes & Noble "meets the typical requirements" of a leveraged buyout candidate, said Morningstar Inc.
analyst Peter Wahlstrom. The retailer generates strong free-cash flow and has relatively low leverage,
Wahlstrom said.
The chain generated about $5.8 billion in sales in the fiscal year ended May 2. It hold just more than $500
million in total debt.
What remains to be seen is whether the retailer, which faces stiff competition from Amazon.com Inc. and
Apple Inc. on the digital front, will garner enough interest from private investors to secure a premium to
satisfy shareholders.
Wahlstrom said a private equity buyer might pony up anywhere between $16 and $21 per share based on
the assumption that an investor would add about $1.1 billion in debt and have a required internal rate of
return of 15% to 20%.
Barnes & Noble is headed toward digital delivery, said Wahlstrom, but it's too early to tell how it will
ultimately shake out, with Amazon and Apple in "very well-established positions."
Love Goel, chairman and CEO of GVG Capital Group, a Minnetonka, Minn., private equity firm specializing in
retail, said Barnes & Noble would be a relatively cheap target because its stock has been under pressure
and the business' market share is shrinking.
Goel, who in a different capacity a decade ago advised Barnes & Noble on its online strategy, said that
based on the retailer's roughly $1.2 billion enterprise value, a buyer could grab it for about 4.5 times its
roughly $300 million in trailing 12-month cash flow. That's a "pretty good discount" compared to the roughly
9 times cash flow other retailers of similar size and scale would command, he added.
Meanwhile, brick-and-mortar book selling, which accounted for about 74% of its sales in the recent fiscal
year, "has been flat, if not on the decline over the past couple of years; it is not perceived as the growth
industry it once was," said Wahlstrom.
Barnes & Noble's digital direction was demonstrated by the March 2009 promotion of its president of Barnes
& Noble.com, William Lynch, to CEO. Lynch has stepped up Barnes & Noble's digital strategy with the $15.7
million March 2009 acquisition of e-book retailer Fictionwise. This was followed by the launch of Barnes &
Noble's eBookstore in July 2009 and the October launch of wireless eBook reader Nook, the company's
answer to Amazon.com's Kindle and Apple's iPad.
Barnes & Noble's fiscal 2010 digital and comparable online sales were up 24%, while same-store sales
languished, falling another 4.8% from the prior year's 5.4% decline.
Wahlstrom said that as a privately held company not pressured to make quarterly earnings, Barnes & Noble
"could accelerate its investment in its digital platform and eReader software."
A private buyer could also eliminate the company's $1 per share dividend that would free up about $55
million in cash per year to direct toward that business, he added.
Goel said a buyer could "monetize" key Barnes & Noble assets, namely its 5 million store loyalty program
customers and "the 15 million people who prefer to shop online at BarnesandNoble.com."
Morris, Nichols, Arsht & Tunnell LLP is serving as Barnes & Noble's legal adviser.
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