In a major strategic move, Liberty Media Corp. (LINTA) has abandoned its plan to buy a controlling stake in Barnes & Noble Inc. (BKS), instead will invest in the company. Last May, Liberty Media decided to acquire 70% stake of Barnes & Noble for around $1.02 billion. Yesterday, the two companies jointly announced that as per the new deal, Liberty Media will now invest $204 million to purchase preferred stock of Barnes & Noble, which can be converted into approximately 12 million shares of the latter. These preferred stocks will pay an annual dividend of 7.75%.
Barnes & Noble is the largest bookseller of the world. The company currently operates 705 general bookstores and 636 college bookstores throughout the U.S. However, in the last couple of years, the traditional booksellers industry is struggling severely from the growing competitive threat from large online retails such as Amazon.com Inc. (AMZN) and discount retailes such as Wal-Mart Stores Inc. (WMT).
Despite this, we believe Liberty Media’s earlier decision to acquire Barnes & Noble was primarily due to an extensive digital business of the latter, which grew by a substantial 64% in the previous quarter. This is in major contrast with the declining print book sell of the company. In 2009, Barnes & Noble created a powerful e-book reader called the NOOK to revamp itself as a digital bookseller. NOOK commands about 25% of the global e-book market and at present is the second largest e-book reader after the “Kindle” of Amazon.com.
Various industry sources reported that the cancellation of earlier deal was mainly due to the disagreemnet among the two entities. The conflict was regarding how to value the NOOK inlight of massive fluctuations in the stock market and an ongoing economic volatility. This critical situation may restrict Liberty Media to invest a huge amount of cash in order to diversify in a completely different business segment.
Nevertheless, we believe the new deal will provide three positive factors for Liberty Media: (1) it will strengthen the company’s top line due to big dividend (2) the company will get two seats in Barnes & Noble’s board of directors since the convertible preferred stocks will effectively give 16.6% controlling stake to Liberty Media (3) the company may increase its stake in the future if e-book reader business flourishes in the future.