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Barnes & Noble's Risky Buyout (Update 1)

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In January, Barnes & Noble said that sales of Nook tablets and e-books fell short of expectations, with sales falling 12.6% from year-ago levels, a faster decline than its core bookstore business.

"While Retail sales of NOOK products fell short of the company's expectations, bookstore sales of core products exceeded the company's expectations, and therefore, the company continues to expect fiscal year 2013 Retail comparable bookstore sales to decline on a percentage basis in the low- to mid-single digits," said Barnes & Noble in a January press release.

Barnes & Noble said the Nook business had revenue of $311 million in the 9-week holiday season, a double-digit decrease, in contrast to a 3.1% decline in comparable store sales at its brick and mortar outlets. While e-book sales increased 13.1% within Nook, the unit's results indicated far fewer than expected tablet sales.

"We entered the holiday with two great new products, NOOK HD and NOOK HD+, both highly rated media tablets of phenomenal quality. NOOK device sales got off to a good start over the Black Friday period, but then fell short of expectations for the balance of holiday," said CEO Lynch, who is "examining" the cause of the shortfall.

Nook now is expected to earn $3 billion in 2013 revenue, while its operating losses remain in line with 2012 levels.

Had Barnes & Noble followed through on its Nook spinoff proposal prior to the holiday season, it might have been able to unlock the unit's value to investors when the company's tablets were en vogue.

"Although the company has done well to sell off slices of NOOK over the past six months, to Microsoft MSFT and Pearson, the sales pitch to additional outside parties (excluding other publishers) is becoming more difficult, in our view, given the recent lagging performance," Peter Wahlstrom, a Morningstar analyst wrote in a February note to clients.

"From a valuation perspective, NOOK Media remains a wildcard, as the market is not ascribing much (if any) value to this segment," the analyst added.

Wahlstrom's note foresaw the prospect of the Nook business and Riggio's involvement in the potential acquisition of bookstore businesses, however, what the analyst highlights as the way to unlock value to shareholders appears to conflict with Monday's proposal.

"If ultimately spun off, we believe that the remaining (core) retail business could be taken private (perhaps with the existing management team taking a prominent role) and/or return to its former dividend-paying ways, which could be an attractive alternative for income seeking investors," Wahlstrom concluded, earlier in February.

Instead, the exact opposite appears in the cards, given a filing by Riggio on Monday.

According to the filing, Riggio notified the Barnes & Noble board he plans to propose to purchase all of the assets of the retail business, including, among other things, Barnes & Noble Booksellers and; and would exclude NOOK Media LLC (comprising the digital and College businesses).

"Mr. Riggio plans to make the proposal in order to facilitate the Company's evaluation of its previously announced review of strategic options for the separation of its investment in NOOK Media LLC," the filing reads.

While a price isn't spelled out, Monday's filing states "the purchase price is currently contemplated to be comprised primarily of cash consideration and the assumption of certain liabilities of the Company. Mr. Riggio would provide the equity financing for the transaction and undertake to arrange any debt financing required for the transaction."

After spurning high-priced takeover bids by the likes of Liberty Media in 2011 and moving slowly in monetizing Nook, investors should be skeptical they are getting a bad deal in Riggio's proposed retail outlet acquisition.

If Barnes & Noble takes Riggio's proposal seriously, the company also needs to explain how it expects to operate Nook or spin it off to investors.

For more on Barnes & Noble, here's a look at four deals that rewrote the company's history and five short-sighted spinoffs. For more on how companies can invest in eBooks, see the reasons why Barnes & Noble can't act like Amazon.

-- Written by Antoine Gara in New York