Barnes & Noble Falls as Liberty Media Cuts Stake - Analyst Blog

Shares of Barnes & Noble, Inc. BKS fell nearly 14% after Liberty Media Corporation LMCA announced to offload the majority of its stake in this retailer of digital media and educational products. Shares had risen over 50% year to date before yesterday's plunge.

Liberty Media will retain roughly 10% of its original stake while divesting the remaining to institutional holders. The deal is expected to conclude on April 8, 2014. Following the stake sale, Liberty Media‘s CEO Greg Maffei will step down from Barnes & Noble's board of directors. As per Liberty Media, the stake sale will provide Barnes & Noble with ample flexibility to accomplish other strategic objectives.

In 2011, Liberty Media had acquired nearly 17% stake (or 12 million preferred shares that carry an annual dividend of 7.75%) in Barnes & Noble for $204 million. Interestingly, Liberty Media had made an offer to acquire a controlling stake of 70% for $17 per share or nearly $1.02 billion in May 2011 before abandoning the idea.

Though Liberty Media has not cited any reason for its divestment, declining sales especially at Barnes & Noble's NOOK division might be a possible reason.  It is widely believed that NOOK was the primary motive behind Liberty Media's stake buyout in the bookstore retailer.

Barnes & Noble's sales for the third quarter of fiscal 2014 (ended Jan 25, 2014) fell 10% to $1,995.8 million with NOOK division sales declining over a massive 50% to $156.9 million. Management blamed the lack of new products and severe competition as the primary reasons for dismal performance of NOOK.

Earlier too, the company had reported a 32.2% year-over-year revenue decline in the division in the second quarter of fiscal 2014 (ended Oct 26, 2013).

Notably, the NOOK division, which handles Barnes & Nobles' digital business including digital content, devices and accessories, was developed to expand the company's digital business and enable it to compete better with online rivals like Amazon Inc. AMZN and Apple Inc. AAPL.

The company had made substantial investment for the development of NOOK and had collaborated with technology giant, Microsoft Corporation MSFT for the purpose. However, at present, the division seems to be failing to deliver as per expectations, compelling Barnes & Noble to take up restructuring aggressively.

Before the news stake sale by Liberty Media hit the market, shares have enjoyed a fabulous run on the index mainly due to better-than-expected earnings for the third quarter of fiscal 2014 along with the performance of other divisions, namely Retail and College which, in spite of minor declines, remain strongly profitable. This has led to a massive upward revision in the Zacks Consensus Estimate for fiscal 2014 as well as 2015.

Barnes & Noble sports a Zacks Rank# 1 (Strong Buy).