Barnes & Noble, Inc. (BKS), Microsoft Corporation (MSFT): The Nook’s Slow Death

In an unanticipated development, Barnes & Noble, Inc. (NYSE:BKS)‘s current chairman has announced preliminary plans to buy out the company’s surprisingly robust bookstore division and spin off its suddenly-struggling Nook e-reader segment. Although the company had been considering a Nook spin-off for some time, the timing and structure of this deal caught investors off guard. It seems as if the Nook’s terrible sales figures during the 2012 holiday season made it clear that the company can no longer rely on the device to spur sustainable growth.

Further, chairman Leonard Riggio was not expected to take such a prominent role in any potential spin-off or buyout. As as result, the company’s shareholders reacted to the news with euphoria and sent the stock up by more than 10 percent. Although a time frame for the deal’s closing has not yet been released, it is probable that it will be finalized within 12 months.

About Barnes & Noble

New York-based Barnes & Noble, Inc. (NYSE:BKS) is the United States’s last major bricks and mortar bookseller. The company operates several hundred mass market bookstores and several hundred education-focused bookstores in North America. Although Barnes & Noble continues to shut outlets at a rapid clip, it still operates a total of about 1,300 physical locations. Most of these outlets contain coffee shops, reading areas, music sections and other amenities. The company also designs, builds and markets the Nook family of e-readers and tablets. In addition, Barnes & Noble, Inc. (NYSE:BKS) operates a full-service e-commerce division that sells books, e-books and branded apparel. The company employs over 30,000 people and lost $61.6 million on gross 2012 revenues of $7.2 billion.

How the deal is structured

Although Riggio has formalized his intention to buy out Barnes & Noble, Inc. (NYSE:BKS)’s bookstore division with an SEC filing, the deal is still in its preliminary stages and may undergo significant changes. Crucially, no offer price has yet been set for the bookstore portion of the company.

Further, the means by which the Nook division will be valued in the event of a spin-off remains unclear. Although the prices that Microsoft Corporation (NASDAQ:MSFT) and Pearson PLC (ADR) (NYSE:PSO) paid for their minority Nook stakes last year appear to value the division at $1.5 billion or more, it is likely that its value has slipped somewhat as a result of its sub-par performance. Microsoft Corporation (NASDAQ:MSFT) could certainly purchase the entire company if it wanted, since it has $68 billion in cash but it seems that it is investing money in its own tablet instead. Microsoft Corporation (NASDAQ:MSFT)’s tablet, the Surface, has sold about 1.5 million units, according to Bloomberg. Since Barnes & Noble’s total market capitalization is less than $1 billion, it appears doubtful that the company’s bookstore business will fetch more than this amount.