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The Deal: B&N Should Take a Page From Indigo Books

By Richard Collings

NEW YORK ( The Deal) -- As Barnes & Noble (BKS - Get Report) was seemingly stymied in its comeback attempts -- after Chairman Leonard Riggio said Tuesday he was putting a possible takeover bid for the company he founded back on the shelf alongside dismal fiscal first-quarter results -- a way out of its bricks-and-mortar quandary might be found by looking north.

Canada's largest bookstore chain, Indigo Books & Music, was once in a similar situation, according to Hilco Organization's SD Retail Consulting President Antony Karabus. Like Barnes & Noble's Nook e-reader, Indigo had tried to go up against the big boys in the field -- Amazon (AMZN) and Apple (AAPL) -- only to have development costs for its e-reader business, Kobo, drain the company's cash.

But when Indigo sold Kobo to Tokyo-based Rakuten for $315 million in November 2011, it gave the company a cash infusion, which it used to transform from primarily a bookseller to more of a lifestyle retailer, selling in complementary categories such as home accents and children's learning, Karabus said.

And Rakuten got a win from the deal because the Japanese online retailer could take the Kobo e-reader international and compete in less-saturated markets overseas.

The Nook, similarly, could benefit by also being introduced into new markets, rather than focusing all its marketing efforts on the intensely competitive U.S., where it is going up against Amazon's Kindle and Apple's iPad, Karabus said.

Right now, all that Nook signifies for Barnes & Noble is an "albatross," as Janney Capital Markets analyst David Strasser put it in a research note Tuesday.

"NOOK continues to be a drag on the company, with a sales decline of 20% and adjusted EBITDA losses of $55 million," Strasser wrote.

Strasser also decried what appeared to be a lack of long-term strategy for Nook from management, which coupled with Riggio's decision not to bid for the company contributes to a "bleak outlook," at least for the near term.

There are big investors who obviously believe there is a place for another e-book reader in the literary marketplace. Pearson PLC (PSO) on December 28 acquired a 5% stake in Nook Media LLC for $89.5 million in cash. Microsoft (MSFT) acquired a 17.6% stake in Nook for $300 million back on April 30, 2012. And Microsoft had been rumored earlier this year to be interested in buying the whole unit for around $1 billion.

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