Microsoft Cuts Losses, Sells Nook Back to Barnes & Noble (BKS)

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Microsoft Corporation (MSFT) and bookseller Barnes & Noble, Inc. (BKS) are on the same page, if you will: Nook Media LLC is better off in Barnes & Noble’s hands. BKS is buying back the 16.8% stake in the Nook e-reader service that Microsoft acquired for $300 million in 2012.

Barnes & Noble will pony up over $125 million in cash and stock for the Nook division, according to an SEC filing.

microsoft-corporation-cuts-losses-sells-nook-business-back-to-barnes-noble-inc

Source: Barnes & Noble website

BKS stock took a steep dive on the news, trading as much as 14% lower at one point on Thursday. Of course, it wasn’t just the decision to buy back a big stake of a faltering enterprise that irked Wall Street. Barnes & Noble also reported its second-quarter results today, and the earnings per share of 12 cents were significantly lower than the 31 cents analysts expected.

When MSFT first bought a stake in the Nook business for $300 million in 2012, the 17.6% chunk gave the Nook empire a $1.7 billion valuation. Things have changed since then, and Nook Media is only worth around $714 million after today’s announced transaction.

We can see that this clearly wasn’t the best venture for Microsoft, but it’s not going to break their bank either. Pearson plc (ADR) (PSO) is the other large remaining investor in Nook Media apart from BKS, and they’re also sitting on some paper losses from their investment. Last year, Pearson ponied up about $90 million for a 5% stake that’s currently worth about $35 million.

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The Nook just hasn’t been able to battle back effectively against e-readers like Amazon.com, Inc. (AMZN) and its Kindle. Most tablets also have e-reader apps and capabilities, so throw in Apple Inc. (AAPL), Samsung Electronics (SSNLF), Google Inc (GOOG) and others into the mix, and consumers have an imposing lineup of options to choose from.

But the bookworms over at Barnes & Noble aren’t dumb after all, and they decided earlier this year to split BKS into two companies: one would consist of the company’s consumer stores and website, the other its college locations and Nook business.

The idea was intended to prevent a cratering e-book business from dragging down the rest of the company with it. While the spinoff is still happening, today’s buyback from MSFT will complicate the split and push back the corporate separation from next March to August.

That’s the sad reality for owners of BKS stock, who will have to pray that Barnes & Noble retail stores — with their blistering 0.5% same-store sales growth last quarter — will be enough to offset a cratering Nook division that saw sales fall 41% last quarter.

Good call jumping ship on this one, Microsoft.

John Devine is assistant editor of InvestorPlace.com. As of this writing he was long AAPL, GOOG and GOOGL. You can follow him on Twitter at @divinebizkid.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/bks-msft-microsoft-corporation-sells-nook-barnes-noble/.

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