Huge Potential Upside for Barnes & Noble

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Recently, Barnes & Noble (NYSE: BKS) has popped up as much as 11.5% to more than $15 per share in one trading day, thanks to its chairman’s intention to make an offer for its bookstores. It was reported chairman Leonard Riggio was solely interested in buying out the book retail business, not the e-book division NOOK. How much is Barnes & Noble worth? What price might the chairman offer for its retail arm? Let’s dig deeper.

Business Snapshot

Barnes & Noble is considered the largest booksellers in the US. As of April 2012, Barnes & Noble operated nearly 1,340 bookstores in 50 states, including nearly 650 bookstores on college campuses, with about 690 stores under the Barnes & Noble Booksellers trade name. Barnes & Noble has three main business segments: B&N Retail, B&N College and NOOK. The majority of its revenue, more than $4.85 billion, or 68% of the total revenue, was generated from the B&N Retail segment. B&N College ranked second with $1.74 billion in revenue in 2012, while NOOK contributed $933.5 million, or 13.1% of the total sales. While B&N Retail and B&N College have generated profits of $154.4 million and $70.6 million, respectively, NOOK has produced a huge loss of more than $286 million. Thus, in 2012, Barnes & Noble reported an overall operating loss of $61.3 million.

A Current Market Price is Quite Cheap

In April 2012, Microsoft (NASDAQ: MSFT) agreed to invest $605 million over five years in the newly established subsidiary NOOK Media, which includes the NOOK digital device, digital content, and college bookstore businesses. Initially, Microsoft would invest $300 million, giving it a 17.6% stake in NOOK Media. In the next five years, Microsoft committed to invest another $305 million. As Microsoft had $68.3 billion in cash, this investment represented only 0.1% of its total cash on hand. With its huge amount of cash, Microsoft could reach $39 per share if it applied David Einhorn’s preferred stock distribution idea. At the current trading price of $27.40 per share, the market is valuing Microsoft at nearly 6.1x EV/EBITDA. Following Microsoft, Pearson acquired a 5% stake in NOOK Media for $89.5 million. Thus, Microsoft and Pearson valued NOOK Media in the range of $1.7 billion - $1.8 billion.

In April 2012 the Anderson family, a controlling shareholder of Books-A-Million (NASDAQ: BAMM), offered to acquire the company at $3.05 per share, with a total transaction worth $48.8 million. The deal valued Books-A-Million at around 10% of sales. If the same method were applied to the valuation of the B&N Retail segment, B&N Retail might be worth about $485 million. Analysts estimated that B&N Retail’s value would be in the range of $485 million - $1 billion. 

Barnes & Noble Should be Worth $35 Per Share

According to the “sum of all parts” valuation, Barnes & Noble might be worth at least $2.1 billion, or $35 per share. Previously, Barnes & Noble had put itself up for sale two years ago, and only John Malone’s Liberty Media was interested. Liberty Media invested $204 million in the company’s preferred stock that paid a 7.75% dividend and was convertible into 12 million shares at $17 apiece.

At the current trading price of $15 per share, the total market cap of Barnes & Noble is around $900 million and the total enterprise value is about $770 million. It seems to be quite cheap compared to the “sum of all parts” valuation. The market is valuing Barnes & Noble at 4.12x EV/EBITDA. Books-A-Million is trading at $2.30 per share, with a total market cap of only $35.85 million. It is valued a bit cheaper, at 3.82x EV/EBITDA.

Foolish Bottom Line

Barnes & Noble could be an interesting opportunistic stock for patient investors. If B&N Retail received a buyout offer of $485 million, the value of Barnes & Noble’s shares would increase dramatically towards $35 per share.  

hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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