Nook Hardware Losses Were $100 Million in Past Year, Analyst Says
Barnes & Noble declined to say Monday if it’s losing money on each Nook device it sells. The retail chain lost $100 million on Nook devices in the last year alone and is selling the hardware “at a loss to remain competitive,” Janney Capital Markets analyst David Strasser said Monday. The estimated loss doesn’t include the “significant” selling, general and administrative expenses for Nook development and ads, he said. B&N is spending a huge amount of money to “pump out new hardware products,” he said. It reported a loss of more than $50 million in the total Nook Media business for each of the past three quarters.
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Strasser was reacting to the retail chain’s disclosure that top shareholder B&N Chairman Leonard Riggio informed the board that he wants to buy all assets of its retail business for an unspecified price, and also speculation that B&N may start to de-emphasize Nook hardware and shift the focus to monetizing the digital content library it has built over the past few years. The analyst believes B&N is “actively looking into additional partnerships with hardware companies to sell” the content, he said. “If the company were to make this shift, Nook profitability would instantly improve,” he said.
The retail business that Riggio wants to buy includes Barnes & Noble Booksellers and barnesandnoble.com, but excludes the Nook Media division, B&N said in an SEC filing. Riggio is making the proposal to “facilitate” B&N’s evaluation of its previously announced review of strategic options for the separation of its investment in Nook Media, it said. B&N “decided to pursue strategic exploratory work to separate” the Nook business from the rest of its business, it said last year (CED Jan 6/12 p3).
The purchase price of the retail business “would be negotiated with” the board and its advisers, B&N said Monday. The price is expected to be made up mainly of cash consideration and the assumption of certain, unspecified B&N liabilities, it said. Riggio would provide the equity financing for the transaction and arrange any debt financing required for it, B&N said. His proposal isn’t binding, it said. The retail chain will “evaluate” Riggio’s proposal, and that process and any negotiation is being overseen by a strategic committee of three independent board members: David Golden, David Wilson and Patricia Higgins, chair of the committee, B&N said. The committee tapped Evercore Partners to serve as its financial adviser and Paul, Weiss, Rifkind, Wharton & Garrison to serve as its legal adviser, B&N said.
"There can be no assurance that the review” of Riggio’s proposal or “the consideration of any transaction will result in a sale of the retail business or in any other transaction,” and there’s “no timetable” for the committee’s review, it said. B&N won’t comment further regarding the evaluation of the proposal “unless and until definitive agreements for a transaction are entered into” or the committee decides to conclude the process, B&N said.
In buying the retail business, Riggio would assume the $338 million on B&N’s credit facility, and combined with the $127 million in debt owed to Riggio, the chain’s retail business has $466 million in debt, Strasser said. Riggio would have to fund the remaining $534 million with cash, debt and/or his 30 percent equity stake in the company that’s worth more than $250 million, he estimated. “We do not believe this will be difficult for him to do,” Strasser said.
B&N warned in late December that its holiday sales results would come in weaker than expected and that the Nook Media business won’t meet its fiscal-year projections, “based on preliminary sales results to date in the holiday period and sales trends” (CED Dec 31 p1). It plans to report Q3 results Thursday. B&N shares closed 11.5 percent higher Monday at $15.06.