Wall Street Debates John Malone's Play for Barnes & Noble

"The offer appears to be a purely financial proposal to acquire an asset that Liberty [Media] management views as undervalued," Barclays Capital analyst James Ratcliffe says.

NEW YORK - Wall Street analysts on Friday tried to explain the motivation for a surprise bid by John Malone's Liberty Media for book retailer Barnes & Noble, news of which had emerged late Thursday.

Most argued that while the company wouldn't make a natural fit with other Liberty businesses, Liberty chairman Malone is likely seeing Barnes & Noble as a challenged business with upside thanks to its growing Nook e-book reader. The device and the e-book market have been growing, and the Nook Color's latest version also includes apps, potentially making the device a play on the growth of tablet computers.
But many see the move simply as a way to invest in a business that has faced many challenges, particularly in the traditional book retail business, and may therefore come at a cheaper price and provide upside. As far as investments in businesses without much overlap with current assets go, Malone has also seen the value of Liberty's stake in Sirius XM Radio rise sharply since helping the satellite radio firm avoid bankruptcy in early 2009.

Liberty said late Thursday it was looking to acquire 70 percent in B&N for $17 per share, or approximately $1 billion, keeping CEO Len Riggio on board and letting him continue to hold his 30 percent stake. The company also said the book retail giant would become part of its Liberty Capital arm, which also holds Sirius XM and other investments.

Liberty Capital shares closed down slightly on Friday, while B&N's stock jumped nearly 30 percent to $18.33 - above the price offered by Liberty.

"Coming from Liberty Capital, the offer appears to be a purely financial proposal to acquire an asset that Liberty management views as undervalued," said Barclays Capital analyst James Ratcliffe in an investor note on Friday. He said he doesn't see synergies with Liberty Capital assets.

"While a combination of B&N with [QVC owner] Liberty Interactive could have generated some operating synergies (integration of the QVC and B&N warehousing/distribution operations), an offer from Liberty Interactive would likely not be viable, given existing bondholder concerns, in particular."

Ratcliffe has an "equal weight" rating on Liberty shares and a new $85 target price, up from $60 due to the gains in Sirius shares.

"While the B&N offer is likely to attract attention, given the difficult bookstore market, we emphasize that Sirius share performance remains the primary factor in driving Liberty Capital valuation," he emphasized. "A 10 percent move in Sirius drives a 6 percent move in our Liberty Capital net asset value."

Added Ratcliffe: "The buyout offer would also provide Ron Burkle's Yucaipa [which has been involved in various media and entertainment company auctions in recent years] an exit option from his 19 percent stake following his unsuccessful proxy fight and effort to overturn B&N's poison pill," which blocks unwanted takeover attempts.

Morgan Stanley analyst Benjamin Swinburne said the B&N play was "not your typical Liberty acquisition." After all, often, Liberty's  investment strategy "realizes value from one, favorable tax attributes or two, adding financial leverage to acquired assets that generate predictable and growing cash flows, or both."

Instead, Malone seems "bullish on books, particularly [the] digital opportunity," Swinburne said. "Liberty's bid reflects a bullish view of the underlying assets, the B&N management and an interest in participating in the digital opportunity."

He expressed concerns about the firm's potential to grow the traditional retail book business and its ability to "compete in the device market against the dominant player Amazon."

Collins Stewart analyst Thomas Eagan said the B&N play will have "no direct or indirect impact on Liberty Starz." He reiterated his "buy" rating on Liberty Starz.

Meanwhile, Janney Montgomery Scott analyst Tony Wible suggested that Liberty's interest in the book retail company could also be seen as a positive for video game retailer GameStop.

"If Liberty likes B&N, it may love GameStop," he said, suggesting the firm could be worth $4.2 billion in a deal with a 20 percent price premium.

The potential Liberty deal "highlights the value in GameStop and could renew investor focus around GameStop's M&A potential."

Email: Georg.Szalai@thr.com
Twitter: @georgszalai