Barnes & Noble, the number one U.S. book store chain, is putting itself up for sale as business suffers in the high-stakes battle for a leading role in the digital books market.
Barnes & Noble, whose shares soared 25 percent on the news, said company founder and top shareholder Leonard Riggio is considering bidding for the company as part of a larger investor group.
An auction for Barnes & Noble could draw interest from several other quarters, including billionaire investor Ron Burkle, as well as raise speculation about a combination with smaller rival Borders Group Inc. Shares in Borders rose 6 percent late on Tuesday.
But valuing a deal for Barnes & Noble, beset by competition from the likes of Amazon.com Inc. and Apple Inc. in the electronic books market, could prove difficult. The company's share price has lost more than half its value in the last year and its market capitalization was just under $760 million as of Tuesday's close.
"How do you value an asset for the future when the entire market is being essentially turned upside down?" said Forrester analyst James McQuivey.
Morningstar analyst Peter Wahlstrom said the company was already trading close to his fair value estimate of $13 per share before it made the announcement.
"This could make strategic sense for them, yes. But I don't want to exactly say it's a good decision," Wahlstrom said. Going private would allow Barnes & Noble to accelerate its investment in its digital book platform, he said.
Burkle sought a controlling interest in Barnes & Noble earlier this year and is suing the company for blocking his efforts through a poison pill that makes it harder for the bookseller to be sold.
Burkle has accused Chairman Riggio and directors of a "self-dealing scheme" to thwart his Yucaipa Cos from mounting an effective proxy contest or amassing significant voting power. He could not be reached for comment.
Hedge fund manager William Ackman, who holds a large stake in Borders, has in the past suggested the two companies could combine. Officials at Barnes & Noble and Borders declined to comment. Ackman could not be reached for comment.
One retail banker, who spoke on condition of anonymity, said some financial buyers could be attracted to the potential to turn around such a well known-company.
"There's a lot of retail situations out there like Barnes & Noble that are sickly from a pure retail play, but could be attractive as an LBO (leveraged buyout) for financial players who have the money and the time to retrench the businesses," the banker said.
Barnes & Noble said it had formed a special committee of four independent directors to consider all options for increasing shareholder value. The company named Lazard as financial advisor and Morris, Nichols, Arsht & Tunnell LLP as legal adviser.
The pressure on Barnes & Noble to realign its strategy became clearer in June, when it reported a larger loss as it spent money to develop its Nook electronic reader, which is outgunned in the market by Amazon's Kindle and Apple's iPad.
Sales at its namesake stores open at least a year had fallen 3.1 percent during its most recent quarter and the company gave a tepid sales outlook for this year.
But the potential for profits from the mass adoption of e-books is great. Barnes & Noble Chief Executive William Lynch said recently the company has a 20 percent share of the e-books market, a position that could lead to sales of $3 billion to $5 billion by 2013.
Amazon said last month that sales of e-books on its site now outstrip sales of hardcover print books.
The more difficult part for the likes of Barnes & Noble has been managing its sales through the transition. Goldman Sachs estimates e-books will make up 12.8 percent of overall book sales in 2015, up from about 3 percent now.
"That uncertainty is in spades in terms of what the role of Barnes and Noble will be and how many stores they'll have and how big, and how they'll compete with Amazon," said McQuivey. "They might feel they want to buy the company back now and take it public later and reap the windfall."
Shares in the company surged to $16.10 after-hours from a close of $12.84. Borders shares rose to $1.40 from $1.32.
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