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Activists Poised to Rewrite Barnes & Noble Book in 2012

Stocks in this article: BKS LMCA

NEW YORK ( TheStreet) - It's no secret Barnes & Noble (BKS), which still draws the bulk of its revenue from the near-extinct retail channel known as bookstores, has struggled to capitalize on new consumer habits and technology. Simply put, the company has failed to build sustainable 21st century profits.

But there's a hitch -- as brick and mortar book sales goes the way of the T. Rex, investors can't agree on whether to call Barnes & Noble a dinosaur or define it as a species that will adapt, with the help of activist investors.

After showing promise in competing against Silicon Valley heavyweights Apple (AAPL) and Amazon (AMZN) with its eBook platform Nook amid a forgettable 2011, Barnes & Noble looks like it has a chance. This has led activists to pile into the company's shares -- this week it was Jana Partners -- with the idea they can help to build an identity that de-emphasizes its bookstores. At the same time, short sellers have gone the other way and bet on failure.

The 12% share stake in Barnes & Noble unveiled by activist investor Jana Partners on Monday underscores that 2012 will be a decisive chapter in the bookseller's history. What's the next page: status quo, asset spins, an outright sale, or even bankruptcy?

Investors should expect a 2012 page-turner from Barnes & Noble.

Currently, Barnes & Noble is fighting wars on multiple fronts as it tries to grow a competitor platform to Apple and Amazon's eBook and tablet platforms.

"They are competing with Amazon and Apple, you've got an antitrust lawsuit and there are a lot of large shareholders on the inside and out. It's a lot of moving parts," says John Tinker, an analyst with Maxim Group.

The New York-based company and its chairman Leonard Riggio spent 2011 warding off Liberty Media (LMCA) and other activist shareholders like Ron Burke-run Yucaipa Companies. Meanwhile, Barnes & Noble saw its profits evaporate into a $74 million 2011 loss. After reporting weaker than expected holiday sales and a grim 2012 outlook, the company said in January it would explore spinning off its promising Nook digital books unit, but the Nook may have its margins challenged by a Department of Justice lawsuit on eBook pricing.

Amid a chorus of gloom and doom about its bookstore model and falling profits, Barnes & Noble may be on the cusp of success with the eBook/tablet business model. It would be a dramatic turnaround after the company lost to Amazon in the online books market a decade ago.

"What is fascinating about Barnes & Noble and the new CEO William Lynch Lynch joined in 2010 is that they've come out with a product that has so far been successful against Amazon and Apple. That's remarkable," adds Tinker.

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