Text size Barnes & Noble is drawing interest from possible acquirers who recognize the potential in a company that is often described as an embattled retailer and Amazon.com roadkill. Barnes & Noble stock (BKS) surged about 21% to $6.61 on Thursday morning, following the company’s announcement on Wednesday that its board of directors “has decided to enter into a formal review process to evaluate strategic alternatives for the company.” The move “follows expressions of interest from multiple parties in making an offer to acquire the company, including” from Leonard Riggio, Barnes & Noble’s 77-year-old chairman and founder. Listen to a conversation between Andrew Bary and Alex Eule on the future of Barnes & Noble, in a recent episode of The Readback. You can sign up for the podcast in iTunes or wherever you listen to podcasts. Riggio probably will be a key player in the coming review because he controls about 18% of the company’s stock, giving him considerable say in the ultimate outcome. There could be more upside in the shares because even following the after-hours rally, Barnes & Noble carries a low valuation relative to cash flow and now has a very digestible market value of about $500 million. The stock is considerably below a high of nearly $14 in 2016. While Barnes & Noble has struggled against Amazon (AMZN) in recent years and experienced declining sales, it has remained profitable. Even with the after-hours run-up in the stock, the company is valued at less than four times projected earnings before interest, taxes, depreciation, and amortization in its fiscal year ending in April. Its current Ebitda projection is $175 million to $200 million. This valuation reflects the company’s equity value and debt of $179 million. Most retailers are valued for at least six times annual Ebitda. The low valuation based on Ebitda could attract financial buyers such as Apollo Global Management, which bought Outerwall, the owner of the Redbox video kiosks, in 2016. Apollo is known to favor value and turnaround buyout situations. Some see considerable potential for Barnes & Noble to boost its earnings, including better monetizing the cafes located in the vast majority of its 629 stores. New York activist investor Rick Schottenfeld, whose firm has taken a 6.9% stake in the company, wrote in a filing last month that it represents “a truly unusual bargain in the retail sector.” He added that the cafes, which are run by the company and use coffee from Starbucks (SBUX), are “significantly undervalued when compared to recent transactions in the coffee space.” The strong interest in coffeehouses was highlighted by Coca-Cola’s (KO) recent $5.1 billion deal to buy Costa, a big chain based in the United Kingdom. Schottenfeld’s view is that the company could create more of a town-square atmosphere in its large and underutilized bookstores by emphasizing experiences like book clubs and children’s birthday parties in effort to distinguish itself from industry heavyweight Amazon. Gabelli analyst John Tinker upgraded his rating to Buy from Hold last month and set a private market value of $10 a share. Tinker cited the cafes in the stores as a “hidden asset.” The company lacks a CEO following the dismissal of Demos Parneros in July. The pressure from Amazon, however, isn’t letting up. In addition to its dominant online presence. Amazon is rolling out physical stores, now numbering 17. One encouraging trend for booksellers is that the e-books market share has plateaued at less than 25% of the market. Many independent bookstores are thriving. Elliott Associates, the well-regarded activist investment firm, has made a bet on physical bookstores with the purchase of the U.K.’s leading chain, Waterstones, earlier this year for about $280 million. Elliott paid about 75% of sales for the chain, while Barnes & Noble is valued at less than 15% of its fiscal 2018 sales of $3.6 billion. Barnes & Noble has been successful with innovations such as monthly book clubs at many stores. The company’s first book-club event, involving The Female Persuasion by Meg Wolitzer, was a success. The company could potentially do more, such as separate fiction and nonfiction book clubs, as well as teen book clubs. Newsletter Sign-up Review & Preview Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow. PREVIEW The company could also lease part of its many stores to online retailers like Casper, which sells mattresses, or Warby Parker, which offers eyeglasses, to showcase their goods. Many online retailers want access to physical locations so potential customers can see, touch, and try out their products. This could boost sales and cut down on costly returns. The publishing industry also is very interested in seeing a viable Barnes & Noble as a counterweight to Amazon. Among other initiatives, Barnes & Noble has moved to improve what has been viewed as a lackluster website. With over 600 stores in generally affluent parts of the country, there seems to be a lot of potential at the company that hasn’t been captured in the depressed stock price. Now that buyers are circling, long-suffering Barnes & Noble shareholders could get a payoff. Corrections & Amplifications The name of the New York activist investor with a stake in Barnes & Noble is Rick Schottenfeld. The original version of this article misspelled his last name as Shottenfeld. Write to Andrew Bary at andrew.bary@barrons.com<doc-sep>What happened Shares of Barnes & Noble Inc. (NYSE:BKS) were rallying today after the struggling bookseller said it would look into strategic alternatives for the company, which could include a sale or going private. Not surprisingly, the stock spiked on the news, with shares up 20.6% as of 10:54 a.m. EDT. So what In a press release, the retailer said it would "enter into a formal review process to evaluate strategic alternatives for the Company," adding that a number of parties have expressed interest in buying the company, including Chairman Leonard Riggio. The company also said it had observed the rapid accumulation of stock by an unidentified party and would adopt a "poison pill" shareholder rights plan in order to prevent a hostile takeover of the company. This is not the first time that the bookseller has sought a sale. The prospect has come up several times since the financial crisis, as the company has been unable to grow or deliver meaningful profits. A separation from the education division in 2015 has not helped the core retailing segment. Now what Given the prospect of a sale, today's pop is certainly justified. At this point, there seems little likelihood of a significant turnaround in the business, as Amazon has come to dominate the book industry. In its most recent quarterly report, Barnes & Noble said comparable-store sales fell 6.1%, and its per-share loss widened to $0.23. With numbers like that, shareholders should be hoping for a sale. Expect more volatility from the stock as news comes out about a potential deal.<doc-sep>
Barnes & Noble Inc. (BKS) - Get Report has put itself up for sale, and the company that killed the bookseller --Amazon.com Inc. (AMZN) - Get Report -- should buy it. One of the most likely buyers, according to reports, is Barnes & Noble Executive Chairman Leonard Riggio, who has a 19.2% stake in the company. But that shouldn't stop Amazon from looking at the books of the erm ... bookseller. Amazon could take all of Barnes & Noble's inventory and put it all on its website, taking the final slice of the market for books that BKS had. It wouldn't be a groundbreaking move, but why let some other company compete in selling books online? Why not just take the books? The second question is feasibility. What really makes this a no-brainer in my eyes is that Barnes & Noble is obviously a small company now, with a market cap of $398.68 million. Amazon has about $20 billion in cash on hand. Assuming a roughly 20% premium, Amazon could buy the struggling book retailer for around $477 million. To be a profitable investor and build long-term wealth, you need the right information and techniques. Join TheStreet Oct. 13, 2018, for a special investing event for sophisticated and active traders. Register for "Invest Like the Pros: Jim Cramer's Boot Camp for Investors" here. The last question is what do Barnes & Noble shareholders want? They want the best deal, and if Amazon really wants to buy it can easily outbid Riggio, who has a net worth of far less than $1 billion. We'll have to see what other bidders are out there, as The Wall Street Journal mentioned there could be others, but Amazon's deep pockets are an advantage. Start, and end, your trading day right with TheStreet's 'Daily Snapshot' on your favorite smart-speaker. Learn more about TheStreet's market coverage for your trusted smart-speaker here. One thing Amazon possibly could want to avoid is any real estate owned by Barnes & Noble. If Amazon bought Barnes & Noble, it does have a few options as to what to do with the real estate. But whatever it does, Amazon would have to sell at least a large chunk of it. That's quite a project, as vetting for a buyer takes time, and Amazon wants to focus on selling products on its platform, not real estate it inherited. Therefore, Amazon could just buy the inventory of Barnes & Noble if the shareholders decide to liquidate all the assets to various buyers, rather than to explore an outright sale of the company to one buyer. But Barnes & Noble shareholders might get more money just selling the company, which is why Amazon may want to make a bid if it's interested taking another slice of the book market. Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more no What Are "Closed-End" Mutual Funds and How Do They Fit into Savvy Investors' Portfolios?Click here to register for a free online video in which TheStreet's retirement expert Robert Powell and an all-star panel run down all you need to know.