Three Reasons Why Going Private May Be the Best Plot Twist for Barnes & Noble
Analysts now expect B&N stock to fall even further. With the ongoing fight between billionaire and key shareholder Ron Burkle and company executives Leonard and Stephen Riggio -- brothers who together hold the biggest stake in B&N -- playing out in a Delaware court on Thursday, signs point ever more clearly to the possibility that Barnes & Noble will go private. And that just might be the best step for the company to take.
The Case for Taking Barnes & Noble Private
A public company may choose to go private for a whole host of reasons. It might be investing more of its time and capital on new initiatives that take away short-term success but may better prepare it for the long haul. It may be tired of the stringent regulations and added expenses placed upon public companies since the Sarbanes-Oxley Act -- recently upheld by the Supreme Court -- was passed in 2002. It may be facing internal battles among shareholders that take time away from the business of running a company. And it may feel that a protracted stock drop precipitated by factors not necessarily in its control may also interfere with a genuine chance at turning things around.
The idea that Barnes & Noble could go private was most recently brought up by publishing industry newsletter Publishers Marketplace. But idle talk seems to have more force attached as the company increasingly fits the bill in almost every case.
Reason One: The eBook Gamble
With the release of its Nook e-reader in November 2009, Barnes & Noble has made an aggressive bid to go after the e-book market and challenge Amazon (AMZN), which holds the dominant market share thanks to the Kindle. Like Amazon, Barnes & Noble has developed applications for every conceivable device -- including Apple's (AAPL) iPad. Unlike Amazon, it doesn't have the luxury of its core business -- the brick-and-mortar store sales -- buttressing the significant investments needed to get its digital side truly developed. Going private might alleviate the stress of producing results too quickly for shareholders and give Barnes & Noble the time and space it needs to stake its rightful e-book territory.
Wall Street had forecast a profit for the new fiscal year, but Barnes & Noble now projects that it will break even at best -- and more likely lose up to 40 cents a share -- as a result of its plan to significantly increase investment in its Nook e-reader. Of course, investors aren't too happy about the losses.
It's something of a "damned if they do, damned if they don't" scenario. Doing nothing would also make investors unhappy. Barnes & Noble, however, has reason to believe its investments will pay off. After all, the company's digital revenues jumped 51% in the fourth quarter of 2009, and its share of the e-book market has increased an order of magnitude, from 2% before the Nook was released last November to 20%.
To reach projected goals of a 25% share of the e-book market by 2013 (which would yield somewhere between $3 billion and $5 billion in revenue) and a greater share of the overall book market, the company will need time and money to make these results happen. If shareholders balk, then, as rumored in publishing and investor circles, private equity would be more than happy to swoop in and save the day in the hopes such an investment will pay off three or four years from now.
Reason Two: The Proxy Battle
The increasingly acrimonious fight between the Riggios and the company's third-largest stakeholder Ron Burkle could be another catalyst for Barnes & Noble to go private. For the last several months, Burkle and Barnes & Noble have battled it out over the billionaire's rapid stock grab and the company's implementation of a "poison pill" measure to prevent Burkle from buying up more than 20% of total shares. Relations soured so much that Burkle filed a lawsuit against Barnes & Noble's board of directors -- and specifically, the Riggios -- in early May, alleging the poison pill measure "is unfair and directors have breached fiduciary duties of loyalty, care and good faith."
The trial will begin on July 8, and it couldn't come at a more fraught time for both parties. The large stock drop has devalued Burkle's stake in a big way, likely increasing his ire about how the company is being run. The overall loss in value also means that Barnes & Noble can hardly afford what looks to be a long and drawn-out battle with just two months until the next board meeting, where a proxy fight is expected to be waged -- or another option, like going private, is put on the table.
Reason Three: The Price is Right
At the moment, Barnes & Noble's current market capitalization is approximately $750 million -- a lot less than at this time last year, but not so anemic that the company can't attract interest in private equity. With eyes on a digital future and beefing up infrastructure, Barnes & Noble is well suited for a cash infusion or two by companies seeing promise and renewed strength after a period of turnaround.
Going private also may get around the Burkle/Riggio battle, which stems in part from Burkle's belief that the company has one set of rules for shareholders like himself and another for its chairman (Leonard) and former CEO (Stephen). Burkle has made noises about engineering a private takeover, and DailyFinance has already speculated that such a scenario might emerge involving Burkle and money management firm Aletheia Research and Management, another significant stakeholder. If B&N does not have to answer to the public, it may be able to take even more risks not only to stay alive in the book business, but eventually thrive.
Hitching a post to private equity produces as many, if not more, complications as staying public with declining stock prices. Opting to go private is a time-consuming affair that requires all shareholders to approve the switch. And if they don't, they may revolt in the form of lawsuits. What's certain is that Barnes & Noble cannot afford to stumble any further. Leaving for private pastures may smooth the ride as the company tries to secure its place in the new digital publishing landscape.