From a corporate perspective, Barnes & Noble doesn’t seem like a great rescue target. The book retailer’s business model has been thoroughly upended by e-commerce, its electronic reading gambit failed and sales have been falling for years.
But that’s not stopping Elliott Management Corp., which agreed to purchase the chain in a deal with an equity value of about $476 million, plus the assumption of debt. After acquiring U.K. book retailer Waterstones last year, Paul Singer’s New York hedge fund believes it has the right model to take on Amazon.com, and will employ James Daunt, chief executive officer of the British bookstore chain, to run Barnes & Noble as well.
“The important thing, from our perspective, is that they are the mirror of us,” Daunt said in a phone interview, referring to Barnes & Noble. “They sell the same books by the same booksellers, often on the same day, and we face many of the same difficulties — some of which we blame Amazon for in a very great way.”
While Amazon has morphed into an everything store, the Seattle e-commerce company got its start with books decades ago. It now sells more than 40% of all the books in the U.S., according to data from Bookstat. To compete with that, Waterstones, which gets less than 5% of its revenue from e-commerce, has taken a different approach. The key, Daunt said, is to “create bookshops that people want to come to.”
Daunt reinvigorated the U.K. franchise by meticulously improving individual stores rather than implementing overarching strategy decisions. The initiatives included upgraded light-bulbs, nicer carpets and better IT to back up operations.
At a time when most retail chains and online retailers feature standardized selections of merchandise and emphasize price above all else, Daunt encourages managers to give their shops a distinctive feel by catering to neighborhood consumers’ tastes and featuring their own selections of books. Employees are encouraged to write their own reviews, which are displayed next to the titles.
It’s unclear how much of that strategy Daunt will be able to implement at Barnes & Noble, which positioned itself as a big-box store for books — often located in strip malls and surrounded by vast parking lots.
Whether or not it can replicate the U.K. model, the acquisition will give Barnes & Noble “more leeway to work on a long-term strategy, even if it means pain in the short term,” said Seema Shah, a consumer discretionary analyst for Bloomberg Intelligence. “While this could improve profitability, the competitive landscape as a whole remains tough, so the success of this acquisition will depend on how Elliott can make BKS relevant again so that it can effectively compete with value and online players.”
With more than 600 stores, Barnes & Noble has tried strategies such as offering food and coffee and selling non-book merchandise, but has failed to stem the onslaught from Amazon.com Inc. Along the way, it’s weathered self-inflicted wounds and internal drama. A big investment in its Nook e-book device — a competitor for Amazon’s Fire tablets — was ultimately a bust.
The company’s shares rose as much as 12% to $6.70 on Friday — above the $6.50 level Elliott agreed to pay.
Including debt, the deal is valued at $683 million, according to the companies. It will be funded by a $700 million asset-based revolving credit facility from Wells Fargo Bank and Bank of America, as well as a $125 million first-in, last-out credit facility backed by a Carlyle Group credit unit, a Pathlight Capital fund and Wells Fargo, according to regulatory filings.
The deal also includes a $30 million breakup fee, the filings show.
Despite the relentless competition, Barnes & Noble has managed to somewhat stabilize its business, with revenue declines narrowing to a drop of 3.1% last year. The retailer still generates cash — sales were almost $3.6 billion last year — and the little outstanding debt on its balance sheet isn’t due until 2023. The company has also spent the past few years closing weak stores or moving them to better locations.
The deal will relieve some pressure on Barnes & Noble, which has faced withering criticism by investors in recent years, according to Ted Gavin, managing director and founding partner of bankruptcy consulting firm Gavin/Solmonese. Nonetheless, it won’t change the fact that “Barnes & Noble is, for all intents and purposes, the second-place horse in a one-horse race.”
“If you thought the SEC was a tough boss to report to, imagine when you replace it with Elliott Management,” Gavin said in an email. “And now, instead of a disinterested public regulator, you’re answering to someone with $683 million worth of skin in the game and fees that it’s looking to be paid.”
—With assistance from Eric Pfanner and Thomas Buckley.