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Barnes & Noble's Risky Buyout (Update 1)

Updated to include closing share prices and Barnes & Noble comments

NEW YORK ( TheStreet) - Barnes & Noble (BKS - Get Report) chairman Leonard Riggio said in a regulatory filing on Monday that he plans to buy the book seller's retail outlets and its Web site, in a deal that leaves investors praying for a long-expected spinoff of the company's burgeoning e-book and tablet business, NOOK Media.

Riggio's proposed take-private of Barnes & Noble bookstores -- still the lion's share of the company's revenue -- may give support to its stalled share price and help with an eventual spinoff of its Nook unit.

Still, the deal is the exact opposite of Barnes & Noble's proposal to spin-off its Nook business just over a year ago, which many expected could give its shareholders a payout after years of under performance.

Riggio's proposal may raise the prospect of a fire sale of the company's staple bookstore business, just when it is needed as ballast to support Nook or its prospective divestiture. [Financial details of Riggio's bookstore proposal or how it would impact Nook remain unclear]

Given the relatively stable performance of Barnes & Noble bookstores through 2012 and a deterioration in the outlook for the Nook business through this holiday season, investors might want to question the reversal of course, amid a weak track record by chairman Riggio in creating value for investors.

After rising nearly 30% in pre-market trading, Barnes & Noble shares have since faded to gains over 11% to $15.06 in Monday trading, erasing the company's year-to-date share losses.

In January of 2012, Barnes and Noble proposed that the company spin off its Nook tablet unit, in a move that could have unlocked the value of the e-book and tablet business for shareholders, while also helping the company to refocus on the retail bookstores at the heart of its earnings and cash flow.

"We see substantial value in what we've built with our Nook business in only two years, and we believe it's the right time to investigate our options to unlock that value," said CEO William Lynch in January 2012.

In April, Barnes & Noble sold a 17.6% stake in the company's Nook business, called Newco, to Microsoft (MSFT - Get Report), in a $300 million cash investment. The deal gave the unit a valuation of about $1.8 billion, or on par with the company's total market cap at the time.

Some investors and analysts took the valuation as a sign of the potential Nook value trapped in Barnes & Noble's shares. Meanwhile, with a monetization of Nook, many also felt Barnes & Noble's legacy bookstore businesses would be given more worth by investors.

After Microsoft's Nook stake, a spinoff remained on track. The move also indicated Nook had a strong partner in Microsoft, which itself is in the midst of rolling out its own app store and a new Windows 8 operating system to take advantage of the growing tablet market.

Just days after Christmas, media giant Pearson took a 5% stake in Nook for $89.5 million, in a move that continued to value the overall e-reader and tablet business at about $1.7 billion.

Microsoft's stake in Nook came just ahead of the well-received launch of its Nook HD 7 and 9-inch tablets, which helped to drive shares in the early part of 2012.

Pearson's stake, in contrast, came as a bookend to the holiday season, which showed weaker-than-expected tablet sales amid competition from the likes of Apple (AAPL - Get Report), Google (GOOG - Get Report)-powered Samsung devices and the emergence of the Amazon (AMZN - Get Report) Kindle.

Now, just as Barnes & Noble's guidance indicates a weakening of the prospects of the Nook tablet, the company appears positioned to sell off retail outlets to Leonard Riggio, the company's chairman and its largest single investor.

While Nook eventually may be monetized for shareholders, according to Riggio's plans, it may leave investors who could benefit from stable bookstore sales in a vulnerable position.

"We believe the issue for investors is not whether there is more value than the stock price in Barnes and Noble bookstores, as we believe that is an easy yes. The issue is whether there is positive value in the money-losing, and increasingly poorly positioned, Nook Media division," Gary Balter, an analyst at Credit Suisse wrote in a note to clients on Monday.

"Left alone, even with cash, will that business make it on its own, or is taking out the positive cash flow stream of Retail, at ~4.5x, a death knell for Nook Media," the analyst notes, in what may be a key question for Barnes & Noble's Board of Directors.

Three independent directors, with the advice of Evercore Partners and Paul, Weiss, Rifkind, Wharton & Garrison, will review Riggio's proposal, Barnes & Noble said in a press release. Barnes & Noble "does not intend to comment further regarding the evaluation of Mr. Riggio's proposal, unless and until definitive agreements for a transaction are entered into," the company said.
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