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Schottenfeld Group Pushing Barnes & Noble to Evaluate Nook Spin-Off Into Separate Entity

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In the wake of the disappointing reaction to Barnes and Noble's (NYSE: BKS) second quarter earnings, Rick Schottenfeld, Chairman and CEO of Schottenfeld Group Holdings, is calling for an immediate spinoff of Barnes and Noble's Nook Media division into a separately traded public company. Mr. Schottenfeld believes the company's current corporate structure prevents shareholders from benefitting from the significant cash flow of the company's mature but successful traditional book retailing business. Schottenfeld asks for the company to clarify its future strategy.

In a letter to BKS Chairman Leonard Riggio dated December 5, 2012 (attached), Schottenfeld said:

“We have watched and waited patiently over the past year as management and the Board of Directors have worked through the process of evaluating the Company's options to enhance shareholder value.

“We believe the company's strategy to deploy 100 percent of its cash flow over the past three years into the Nook has been disastrous. The approximately $900,000,000 the Company has lost or invested in this business over that period represents almost $13 per share which is near today's current share price. We believe there were much better uses for our cash flow over this period.

“Unfortunately, what we are left with today is a dysfunctional business with two divisions that are seemingly at odds with each other. Barnes and Noble Retail is the dominant ‘last man standing' in the physical book business. As such, this business should be run to maximize free cash flow. This free cash flow should be returned to the shareholders in the form of share repurchases and dividends. The Nook Media business is the quintessential growth business with all of the risks and opportunities associated with such companies. These two companies are attractive to two distinct groups of investors.

“We are not here to dwell on the past, but rather to look forward to the Company's successful future. I have asked management to share its views on the issues raised in this letter on the last several earnings conference calls and have yet to receive any meaningful response. It is our hope that by sharing our thoughts with the Board and other shareholders we can move this process forward more expeditiously. A split into two separate publicly listed entities would allow both divisions of the company to run more effectively. It will provide an option for those investors who are attracted to either the cash flow of the Retail business or those who want to participate in the growth of the promising Nook business.

“We urge other similarly minded shareholders to make their voices heard and implore the Board and management to act without delay.”

About Schottenfeld Group Holdings: Schottenfeld Group Holdings, L.P. is a diversified investment company and the managing member of Koyote Capital Group LLC. The companies are headquartered in New York City.

  Full text of letter follows:    

Mr. Leonard S. Riggio Board of Directors Barnes & Noble, Inc. 122 Fifth Avenue New York, NY 10011

December 5, 2012

Mr. Riggio,

I am the chairman of Schottenfeld Group Holdings. Primarily through our subsidiary Koyote Capital, we have a significant ownership interest in Barnes and Noble, Inc. (the “Company”). We have watched and waited patiently over the past year as management and the Board of Directors have worked through the process of evaluating the Company's options to enhance shareholder value. We were encouraged by the announcement of the Company's transaction with Microsoft and the validation it implies for your Nook Media division. We also understand the complexity of splitting the Company into the two separate divisions this transaction required. The purpose of this letter is to share with you our view that with the Microsoft transaction finalized, it is in the best interest of shareholders for the Company to spin off the Nook Media division into a completely separate publically listed company. This will allow current shareholders to benefit from the significant cash flow of the Company's mature but successful traditional Book retailing business.

We believe the company's strategy to deploy 100 percent of its cash flow over the past three years into the Nook has been disastrous. The approximately $900,000,000 the Company has lost or invested in this business over that period represents almost $13 per share which is near today's current share price. We believe there were much better uses for our cash flow over this period. For example, had the Company instead initiated a stock buy-back plan (using the volume weighted average price over the last three years of $15.40) the Company could have repurchased approximately 82% of its current shares outstanding. Alternatively, had the Company initiated a dividend, the stock could have yielded over 25% for that same time frame. It is clear to us, and we believe to any other rational investors, that either of these strategies would have created more value for shareholders.

Unfortunately, what we are left with today is a dysfunctional business with two divisions that are seemingly at odds with each other. Barnes and Noble Retail is the dominant “last man standing” in the physical book business. As such, this business should be run to maximize free cash flow. This free cash flow should be returned to the shareholders in the form of share repurchases and dividends. The Nook Media business is the quintessential growth business with all of the risks and opportunities associated with such companies. These two companies are attractive to two distinct groups of investors. In order to truly maximize the values inherent in these businesses they must be separate public vehicles. Barnes and Noble Retail's goal should be to work with publishers on “windowing” new releases between physical and digital form, expanding margins in recognition of the value of their shelf space for both physical and digital purchases, and trying to make sure people choose the physical book experience over digital whenever possible. Nook Media's goal should be to put Barnes and Noble Retail out of business. It should try to make sure nobody ever wants to purchase another physical book again. Clayton M. Christensen in his renowned book The Innovator's Dilemma clearly demonstrates why two such distinctly opposite companies cannot and should not survive under the same “umbrella”.

We are not here to dwell on the past, but rather to look forward to the Company's successful future. I have asked management to share its views on the issues raised in this letter on the last several earnings conference calls and have yet to receive any meaningful response. It is our hope that by sharing our thoughts with the Board and other shareholders we can move this process forward more expeditiously. A split into two separate publically listed entities would allow both divisions of the company to run more effectively. It will provide an option for those investors who are attracted to either the cash flow of the Retail business or those who want to participate in the growth of the promising Nook business. If management's strategy in developing the Nook bares fruit, those shareholders like us, who believe in both, will lose no upside and gain the ability of our two companies to pursue their own self interests. With Microsoft's $300,000,000 in the bank, and an additional $305,000,000 available over the next 5 years, Nook Media should have the capital it needs to go forward alone. It can also pursue further funding and capital free from the inherent conflicts of interest that exist today. A free standing Barnes and Noble Retail would be able to return its next $900,000,000 to shareholders. We urge other similarly minded shareholders to make their voices heard and implore the Board and management to act without delay.

Rick Schottenfeld Chairman & CEO Schottenfeld Group Holdings

Contact:

Schottenfeld Group Holdings, L.P. Carolyn Andoscia, 212-475-2122

Posted-In: News

 

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