Barnes & Noble Investors Shouldn't Bet on Buyout

(Bloomberg Gadfly) -- Barnes & Noble Inc.'s beleaguered shareholders shouldn't count on a fairy-tale rescue. 

The bookseller's shares spiked as much as 19 percent on Thursday following reports that resident activist Sandell Asset Management has a grand plan to take the New York-based company private, according to the Wall Street Journal and other media outlets. Although the company has undeniable takeover appeal -- not least because its shares are trading at bargain-bin levels -- caution is needed. 

Barnes & Noble Investors Shouldn't Bet on Buyout

The proposal, said to value Barnes & Noble at more than $9 a share, isn't your average take-private offer. Importantly, Sandell's plan requires $500 million in debt financing, which it hasn't lined up yet (and the company is skeptical that it can). But even if it does, such borrowings would leave the retailer saddled with a debt load equivalent to 2.8 times its forward earnings before interest, taxes, depreciation and amortization. That's not an astronomical figure, but it is more than double its current level of 0.5 times.

Barnes & Noble Investors Shouldn't Bet on Buyout

Securing that financing would likely be difficult and expensive, given Barnes & Noble's declining sales and its vulnerability to increased competition from its nemesis, Amazon.com Inc. (You may recall that the e-commerce giant has developed its own physical bookstore concept and is making delivery and returns even easier by striking partnerships with companies like Kohl's Corp.) 

Another major hurdle? For Sandell's proposal to work, more than a third of the retailer's shareholders must be willing to convert their stakes into shares in a private company. That historically isn't a well-trodden path, if only because stock investors enjoy the advantage of liquidity.

Barnes & Noble's biggest shareholder, its chairman and founder Leonard Riggio, isn't interested in rolling his stake, which is interesting given that any such deal would help him preserve wealth. That alone may be enough to kill this plan, especially since Sandell is in no position to take the company private on its own and is unlikely to have the backing of major institutional shareholders such as BlackRock Inc., Dimensional Fund Advisors LP and Vanguard Group Inc. 

To be sure, the initial enthusiasm surrounding Sandell's plan waned in afternoon trading, as some investors came to their senses and Barnes & Noble said it didn't consider the offer "bona fide". Still, the stock hung onto almost 8 percent of its gains, which seems generous -- unless the overture is able to draw out a truly credible offer from another suitor.

Remember, no such suitor has shown up even though Barnes & Noble has basically been in play since Sandell disclosed its stake in July and basically pitched the company as a sale candidate. And Riggio's hesitance to participate could be interpreted as a sign that he's less inclined to team up with a private equity firm to take the company private.

Barnes & Noble shareholders should beware. "The End" may look a lot different than what they're hoping for. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

  1. The calculation is based on the fact that Sandell's offer, which values the company at about $666 million, would require roughly $250 million in equity to come from Barnes & Noble shareholders keeping their stakes.

  2. That's an ambition that the Nordstrom family has had to put on hold for now in regards to its namesake department-store chain, partly because of hesitant lenders. 

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

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