Meanwhile, its brick-and-mortar business appears to be headed for the same fate as its former competitor, Borders, which went bankrupt and was absorbed by Barnes & Noble in 2011. Sales at Barnes & Noble’s retail stores plunged 10% and EBITDA declined 24%. Same-store sales declined 8.8%. Again, excluding sales of Nook products, same-store sales would have posted a slightly lower decline of 5.8%.
Considering these major problems with the company, it’s no wonder that Chairman Leonard Riggio, who acquired Barnes & Noble, Inc. (NYSE:BKS) in 1971 and expanded it into the largest bookseller in the world by 2000, is interested in splitting the company up and taking its nearly 700 retail stores private. If Riggio moves ahead with this plan, he will likely sell or spin off the Nook Media division. However, which company could want to purchase Nook Media in its current state? In addition, Riggio will need to contend with Microsoft and Pearson, which own a combined 22% of the troubled division.
Potential suitors and partners
Although Nook Media looks quite toxic in its current state, I believe that Amazon and Microsoft could both successfully acquire the business and turn it around. Amazon has a habit of absorbing its competitors, such as Goodreads, with the intention of growing its user base. Amazon was willing to pay an estimated $150 million to acquire Goodreads’ 16 million members. The estimated 10-15 million Nook users still out there could be a worthy prize for Amazon, and a symbolic victory over its former adversary.
In addition, combining Nook Media’s design and manufacturing division with Amazon’s Lab126, which created the Kindle, could generate some significant cost-saving synergies. If the acquisition is made on mutually friendly terms, Amazon could even use Barnes & Noble’s brick-and-mortar locations to expand its fulfillment center network.
Microsoft, on the other hand, should simply take over Nook Media to keep it out of the hands of Amazon and Google. Google was rumored to be interested in acquiring the Nook Media division to create a more robust e-book platform to rival Amazon and Apple, which could be very disruptive when combined with its current plans to dominate Internet radio. It would be a wise move for Microsoft to use Nook Media to widen its defensive moat against both companies.
Even if Microsoft doesn’t want to go as far as acquiring Nook Media, it could answer Barnes & Noble’s call for a “co-branding” partner to produce Nook color tablets. Microsoft-branded Nook tablets could give the products a technological legitimacy that they had lacked before.
The Foolish Bottom Line
Despite these tantalizing possibilities, I believe investors should avoid shares of Barnes & Noble, Inc. (NYSE:BKS). There are simply too many uncertainties on the horizon, and its financial metrics are all headed in the wrong direction. I think there is still a lot of downside for this stock, and any upside potential will be generated by talks of a spin-off or acquisition, rather than through any real fundamental growth.
The article This Book Retailer Is Approaching its Eleventh Hour originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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