NEW YORK (
Barnes & Noble
(BKS - Get Report)
should spin off its
unit of e-readers and e-books, fulfilling a strategy the company said it was exploring at the start of 2012, according to a letter sent by an investor to company management on Friday.
Rick Schottenfeld, head of investment firm the Schottenfeld Group, said in a letter sent to Barnes & Noble that the company should follow through on a proposal to spin its fast growing Nook business into a separate publicly traded company.
The move, Schottenfeld said, would help to the bookseller's strategy and unlock significant shareholder value. A prospective spinoff would also follow through on a plan the company said it
in early 2012.
In the Friday letter sent to Barnes & Noble chairman Leonard Riggio, Schottenfeld argued that significant stockholder value is trapped within the company's conglomerate structure, which includes a declining but cash flow positive physical bookstore business and, Nook, its fast-growing but money losing digital books and tablet unit.
Schottenfeld argued Barnes & Noble's mature and cash generating retail unit isn't a good fit with its high growth Nook business in public markets. A spinoff, he said, would give investors reason to pay higher multiples for Barnes & Noble's combined assets. Meanwhile, the investor also argued investing Barnes & Noble's legacy bookstore cash flow into Nook has been a poor use of the company's liquidity.
"Unfortunately, what we are left with today is a dysfunctional business with two divisions that are seemingly at odds with each other," wrote Schottenfeld, in the letter that recommended Barnes & Noble's maximize the free cash flow of its physical book business and return that cash to investors by way of dividends and share repurchases.
Schottenfeld characterized Nook as a growth business with risk and reward characteristics for a different type of investor. "These two companies are attractive to two distinct groups of investors," he wrote, of logic of a spinoff.
There's already indication Barnes & Noble agrees with the assessment, even if it's unwilling to fully commit to a Nook spinoff. In early January, Barnes & Noble said in fiscal 2011 third quarter earnings it was considering a split of Nook from its physical bookstores business.
In May, the company
it was embarking on a joint venture with
(MSFT - Get Report)
on Nook where the tech giant would invest $300 million in the e-reader business and feature a Nook app as part of its recently launched Windows 8 platform.
The JV was finalized in October; however, Nook has yet to be spun off into a separate publicly traded company. At the
IMN Activist Investor Conference
in May, hedge fund Jana Partners said it took an 11% stake in Barnes & Noble on the heels of its consideration to spin Nook into a separate publicly traded company.