It's another stunner for the shorts this morning as Barnes & Noble (BKS) shares have skyrocketed more than 60% thanks to a $300 million investment by Microsoft (MSFT) and an agreed-upon valuation for its e-book business that was about double what the market saw.
So where does Barnes & Noble go from here? Can it compete in e-books?
It's smart to focus on the textbook and educational markets with Microsoft. Right now, that's an open market for Apple (AAPL) and an area that Steve Jobs said he'd "cracked"(in addition to TV) before he died. The latest data from Apple shows that it continues to move headlong into that niche with great success.
One of the nuggets from the Apple earnings call last week was the $100 decrease in the price of the older iPads is having on cost-conscious buyers. Educators were specifically mentioned as part of that group who'd swooped in and picked up the cheaper iPads for student use.
With a big partner in Microsoft, which also wants to win, Barnes & Noble has a chance to go after that market with a renewed focus that differentiates it from Amazon (AMZN). For Microsoft, it's a great way to convert a tablet partner on a forked Android operating system over to the new Windows Phone platform.
For Google's (GOOG) Android, there's just one less successful Android tablet out there. Now Amazon's Kindle will own more than 50% of the market for Android tablets. It's not a "success story" that Google's Mobile chief Andy Rubin wants to brag about, though, because of Amazon forking on the OS and using its open-source abilities with no ties back to Google.
So, there's some viability for the BKS e-book business thanks to this deal.
What about the old BKS brick-and-mortar stores? The biggest BKS shareholders having a great day today are John Malone, JANA Partners and Ron Burkle. It's likely the first two are going to be exiting soon thanks to this hefty win.
But Burkle is going to get his chance to sink his teeth into the old BKS once the spin of the e-book business is complete. From the beginning of his investment, Burkle has always coveted the prime BKS retail real estate.
On Friday, that retail business was being valued at 3x EBITDA. To have exactly that valuation today after this deal for the e-book business, BKS stock would have to trade at $28. Even then, it's fairly cheap.
It's very likely that Burkle will get his chance to explore how to unlock the value embedded in those retail sites over the next year. John Malone might even stick around for the fun.
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