On Monday morning, the Anderson family, majority shareholders of Books A Million (NASDAQ:BAMM) , made a takeover offer for the 47% of shares it does not currently own for $3.05 per share in cash, representing a 13% premium over the average stock price the past 90 days and a 35% discount to the 52 week high. After topping out at $3.27 the day of the merger, shares have settled at the offer price of $3.05.
The fortunes of Books A Million have been in question for at least the past two years as consumers are increasingly purchasing their books online and in electronic format on sites such as Amazon.com (NASDAQ:AMZN) and BarnesandNoble.com (NYSE:BKS). Accordingly, sales have declined every year since 2008, and with it, the company's profitability.
Books A Million Sales, in $ Millions
The bankruptcy of Borders last year completely changed the book retailing landscape. Initially, the clearance sales at Borders stores throughout the country was thought to take away sales from other book retailers. However, more than 6 months after the last Borders store closing, regular demand should be restored. The closed infrastructure should be of benefit to any of the Barnes and Noble and Books A Million stores that were within close proximity of Borders stores. Of particular note, Books A Million leased the space of over 50 Borders store, increasing its own store count by a third to over 200. There is absolutely no reason that management would have made a drastic strategic decision like this if they didn't think the company stood to gain.
The most glaring problem with the Anderson family's takeover proposal is that it values shares nearly 60% below tangible book value of $7.25. Even if non-land-and-building property and equipment is totally written down, the company is still left with a tangible book value 30% greater than the takeover price. If current management thinks that the book value overstates the company's assets, it should write down the value of whatever inventory or equipment it thinks has declined in value. Otherwise, the family will have a hard time proving the company is worth a mere $3.05 per share.
It is entirely likely that after the special committee of independent directors meets with its financial and legal advisors, it informs the Anderson family that in order to be able to recommend the acquisition, the consideration for the merger needs to be increased to $3.50-$4.50. While no one can say for certain whether or not the Anderson family is willing to offer an increased price, the family is stuck in a corner. On one hand, they are telling shareholders that this offer represents an attractive opportunity. Since the company went public in the early 90's, the stock price has averaged $5 per share, seemingly making this offer less than compelling. On the other hand, why would the family put their entire investment at risk, in addition to debt to be taken on, if they didn't think there was compelling value in the company being private? Considering the company has been run almost like a private company as long as I have been following it (the past few years), it stands to reason that the family would offer up another $8 million - $15 million to get the deal done and make this company a private asset of the family.
Disclosure: I am long BAMM.