NEW YORK (
bid of $1 billion for
Barnes & Noble
is being criticized, in many camps, as being too low. But considering that we're dealing with a dying industry, and consider that this is Barnes & Noble's first worthwhile bid since going on the market last August, can beggars be choosers?
The deal, which must be approved by Barnes & Noble's board and its biggest shareholders, Leonard Riggio, Yucaipa and Aletheia, is worth $17 a share, a 20% premium over its closing price of $14.11 on Thursday.
"We believe this price is inadequate, based on near- and long-term prospects for Barnes & Noble as they build their e-book platform," Janney Capital Markets analyst David Strasser wrote in a note. "We believe that this deal would confuse near-term spending for long-term opportunity. We acknowledge that the company put itself up for sale last year, and could not find a buyer. At the time, the price was about $15. However, our view of the e-book opportunity and the transitory opportunity from Borders bankruptcy makes this offer inadequate."
This seems to be the sentiment of most sell-side analysts, who believe the long-term prospects for Barnes & Noble are still very viable.
Strasser notes that Barnes & Noble has potential for earnings well in excess of its previous peak just by maintaining its approximate 28% market share in digital books. He estimates that Barnes & Noble's e-commerce segment alone could generate more than $1.50 per share in earnings by 2013.
Credit Suisse analyst Gary Balter said Barnes & Noble's position in the e-book market, combined with the closing of
stores, could result in EBITDA power between $400 and $500 million.
The company is also expected to launch a new version of its Nook e-reader next week, and the device is rumored to be closer to a tablet than a pure e-reader.
But there's no denying that the book industry is in some serious trouble. In February, rival Borders filed for Ch. 11, and it has since shuttered hundreds of its brick-and-mortar locations. While the company has said that it plans to emerge from bankruptcy this fall, there have also been rumblings that it could be bought out by an investor.
In the near-term, Barnes & Noble will be shelling out a lot of cash that will most likely hurt earnings, Strasser said.
Barnes & Noble eliminated its guidance for the year to reflect the uncertainty around the near-term impact of Borders' bankruptcy. The company also discontinued paying a dividend as it looks to use its cash to invest in its digital strategy.
And while Barnes & Noble is beefing up its Nook, it still faces some serious competition from
Amazon announced on Thursday that e-book sales outpaced that of printed editions for the first time ever.
"The Achilles heel in the Barnes & Noble story is that while they may have the best e-reader now, Amazon is expected to introduce a tablet with more advanced e-reading capabilities and others are likely to swamp the field," Balter wrote in a note. "As a public company covered by retail analysts, Barnes & Noble may not have the leeway or resources to keep up the technology battle and deliver rising EBITDA."
Under Liberty, Barnes & Noble may be able to seriously compete with tech giants in the digital market and also gains the distribution channel of QVC. While the $1 billion bid may seem a bit low, in a market where consumer fear is only expected to accelerate later in the year, Barnes & Noble may want to snatch up the bid while it can.
--Written by Jeanine Poggi in New York.
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