Bloomberg News

Barnes & Noble Takeover Seen 41% Above $1 Billion Bid: Real M&A

June 01, 2011

June 1 (Bloomberg) -- Barnes & Noble Inc. investors are betting they can extract the biggest price increase in America after billionaire John Malone offered to buy the bookstore chain at an 81 percent discount to sales.

The New York-based company yesterday traded 15 percent above the $17-a-share bid from Malone’s Liberty Media Corp., the most since the deal was announced last month and the widest gap of any all-cash takeover in the U.S., according to data compiled by Bloomberg. Barnes & Noble may get $24 a share, said Mediatech Capital Partners LLC, 41 percent higher than Malone’s bid and almost double the stock’s average price before the offer.

While the largest U.S. bookstore chain has been exploring a sale since August as the shares slumped to a 15-year low of $8.77, Barnes & Noble’s revenue is projected to jump to a record this year helped by sales of the Nook e-reader, which competes with Amazon.com Inc.’s Kindle. Ron Burkle, the largest investor after founder Leonard Riggio, boosted his stake four days after Malone’s bid at an 8.8 percent premium to the deal price. Now, traders are betting on a sweetened offer from Malone or Burkle, according to Capstone Global Markets LLC and Mediatech.

“The market believes that the intrinsic value for Barnes & Noble is much higher,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone in New York. Burkle is “going to try to get the best price,” he said. “Why would he acquire shares if he knew the stock was worth $17?”

Mary Ellen Keating, a spokeswoman for Barnes & Noble, declined to comment. Heather Lipp, a spokeswoman for Liberty Media, didn’t return a phone call seeking comment. Frank Quintero, a spokesman for Burkle and his Yucaipa Cos. investment firm, also didn’t respond to a request for comment.

All-Cash Bid

Liberty of Englewood, Colorado, offered $17 a share in cash on May 19, a 40 percent premium to the 20-day trading average, to buy 70 percent of Barnes & Noble. The deal is contingent on Riggio, the company’s chairman, keeping his 30 percent stake and a management role. A board committee is evaluating the proposal, which values the retailer at about $1 billion plus $278 million in net debt.

Barnes & Noble’s shares dropped 5.9 percent to $18.46 at 1:23 p.m. today in New York.

Malone, Liberty’s 70-year-old chairman, is betting on increased sales of the Nook e-reader and digital books for the device, as well as a boost from Borders Group Inc. closing stores after filing for bankruptcy protection in February.

The offer values Barnes & Noble at 0.19 times its $6.95 billion of revenue in the 12 months through January.

Cheapest Since 2000

That’s the cheapest for any takeover of a U.S. retailer greater than $500 million since Mexican billionaire Carlos Slim bought the 85 percent of CompUSA Inc. he didn’t already own in 2000. Slim acquired what was then the largest U.S. computer superstore chain at an 83 percent discount to revenue, according to data compiled by Bloomberg.

Barnes & Noble closed at a one-year high of $19.62 yesterday. The price implied that arbitragers are expecting at least $158 million more from Liberty or a competing offer, the data show.

“Clearly people are betting that maybe Burkle comes back,” said Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access.

It took nine months for a buyer to materialize after Barnes & Noble hired Lazard Ltd. to explore a sale. Some potential bidders balked at a purchase because of how long it may take the chain to generate more digital sales, two people with knowledge of the process, who asked not to be identified because negotiations weren’t public, said in March.

Stock Risk

If Barnes & Noble is left without a buyer, investors risk the shares retreating 37 percent from yesterday’s close to their 20-day average of $12.35 before Malone’s proposal.

“If Liberty sweetens it, I don’t know how much more they go,” said Michael Souers, an equities analyst for Standard & Poor’s in New York who expects the shares to reach $19. “The stock might be getting a little ahead of itself in terms of investors hoping for a bigger offer.”

Liberty’s “expectation” is that the $17-a-share offer will be successful and represents fair value, Chief Executive Officer Greg Maffei said at a Barclays Plc conference May 24.

Burkle’s Yucaipa began building its stake in Barnes & Noble in November 2008, acquiring 8 percent of the stock at an average of $14.68 a share. A year later, the Los Angeles-based investment fund boosted its position to almost 17 percent with purchases averaging $19.86 a share.

The company’s board then adopted a so-called poison pill to prevent an unwanted takeover if an investor accumulates more than 20 percent. Burkle, 58, lost a bid in court last year to invalidate the defense.

Burkle Considered Bid

Yucaipa considered a buyout of Barnes & Noble at $25 a share before deciding it would be “a waste of time” because of the Riggio family’s stake, Burkle testified in July.

Now, Yucaipa holds just under 20 percent of Barnes & Noble, after purchasing an additional 603,000 shares at an average of $18.49 on May 23, four days after Malone’s $17-a-share offer, according to a regulatory filing.

“Burkle would like to take it private. He made that very clear last year,” said Porter Bibb, managing partner at Mediatech, a New York-based investment bank. If Burkle and Aletheia Research and Management Inc., the company’s third- largest shareholder, don’t get a price they think they deserve, it may lead to a lawsuit, he said.

Liberty will probably complete the deal at about $23 or $24 a share, Mediatech’s Bibb said. That would represent a premium of as much as 41 percent to the current offer, or a boost of about $422 million.

Building the Nook

While the company could afford to pay $22.60 a share, it will probably only go as high as $20, estimates Robert Routh, a New York-based analyst with Phoenix Partners Group LP.

Barnes & Noble suspended its dividend and sacrificed profits to build its digital book business since introducing the Nook in October 2009. The company claims about 22 percent of the e-reader market and 27 percent of e-book sales in the U.S., according to a February report from Goldman Sachs Group Inc. Seattle-based Amazon released the Kindle about two years earlier and controls 67 percent of the e-reader market and 58 percent of e-book sales, according to Goldman.

The Nook helped drive a 7.3 percent increase in revenue at stores open a year in the quarter ended Jan. 29, the first gain since 2007. Total revenue is projected to gain 5.6 percent to $7.4 billion in the fiscal year ending April 2012, while the company is expected to record a second consecutive net loss, according to analysts’ estimates compiled by Bloomberg.

‘Run Away’

Getting Riggio’s support is necessary for anyone to pull off an acquisition, according to Wall Street Access’ Lobravico, who isn’t convinced that Riggio is a willing seller. Shareholders’ best bet is to hold out for a higher bid from Liberty, S&P’s Souers said.

“It’s more likely they will sweeten the offer than run away,” Souers said. “It makes sense for Barnes & Noble shareholders to wait it out and hope for a better offer.”

Overall, there have been 10,378 deals announced globally this year, totaling $1 trillion, a 22 percent increase from the $820.6 billion in the same period in 2010, according to data compiled by Bloomberg.

--With assistance from Julie Alnwick, Brett Pulley and Daniel Hauck in New York. Editors: Sarah Rabil, Michael Tsang.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net; Justin Doom in New York at jdoom1@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Robin Ajello at rajello@bloomberg.net.


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