Liberty Media (LCAPA) previously offered to purchase bookstore chain Barnes & Noble (BKS) for $17 per share. Because of the financial turmoil in the markets this month and amid rumors that Liberty had troubles securing the financing to close on the deal, it is not completely surprising that the deal fell through. But the two companies instead announced the sale of $204 million of convertible preferred bonds to Liberty Media.
This is a bitter disappointment for BKS shareholders and it is now hard to appreciate the value in BKS shares. This is a tough realization for us considering that we once called BKS the cheapest technology stock in the market.
In July 21 when the stock price was at $17.99, we discussed many of our concerns about BKS in "Why I Finally Sold Barnes & Noble." Among other things, we highlighted, lack of buyout interest, continued over dependence on traditional book sales, competitive threat from large technology competitors, recent earnings disappointment and the greater than usual disadvantage of being a minority shareholder. These are and continue to be pressing shareholder concerns, but the latest Liberty bond placement adds new red flags about the bookstore chain's future prospects.
Much of the initial excitement was centered on potential synergies between Liberty and Barnes & Noble. Many market watchers cited Liberty's successful funding of Sirius XM (SIRI) as an example of the company's ability to find diamonds in the investment rough. But the investment was strictly financial in nature and did not add operational benefits. As such, there was no reason to assume that BKS could benefit from the Liberty buyout.
But even if this buyout was completed on schedule, the company still faces tremendous competitive threats from Amazon.com (AMZN) and Apple Inc (AAPL). AMZN will likely continue to drop the price of its Kindle reader and its expected entrance into the tablet market later this year adds additional pressure. On top of that, Apple's iPad continues to dominate the tablet market. As it evolves its product, there is tremendous pressure on BKS to continue improving its offerings.
The post-deal concerns can be summarized as follows:
- The failed Liberty deal reinforces our initial concern that BKS lacked buyout interest from potential strategic partners. The company is clearly in a secular decline and without proper catalysts, they face a difficult future.
- The convertible preferred security adds $204 million of securities ahead of current shareholders along the capital structure. This is a negative development. This is even more alarming considering that CEO Leonard Riggio and other insiders are large common shareholders. For them to sign off on such a major placement of senior securities, it may signal a desperation for capital.
- The interest payments on the convertible preferred security are 7.75% annually. This is a high cost, especially considering that it includes a convertible stock component that was pegged to the original buyout price of $17. Especially in this low yield environment, the interest costs of the new securities signals a real deterioration in stock sentiment.