Could a Nook spin-off close the book on B&N?

The company is trying to sell its publishing business and may give up on its e-reader, too. The move reeks of desperation and could mean the end of Barnes & Noble as we know it.

By InvestorPlace Jan 5, 2012 1:24PM
By Tom Taulli

Barnes & Noble (BKS) has put together a strong e-commerce platform and a popular e-reader, the Nook, that has allowed it to avoid the fate of many brick-and-mortar booksellers. Thanks to growth from its e-book division and the relative popularity of the low-cost Nook, B&N narrowed its losses and saw revenue jump 20% in fiscal 2011 over the previous year.

Too bad Barnes & Noble is now giving up on the Nook. Recent reports say the company will spin off production of the tablet.

That reeks of desperation and is likely the end of both the Nook reader and Barnes & Noble as we know it.

When Borders went bust last year, it looked like a classic case study of a company that was unable to evolve. Just some of the blunders included outsourcing its e-commerce site to Amazon (AMZN) and the lackluster efforts with its own e-reader tablet.

Those were certainly key factors. But they all reflected the fact that the traditional book business is eroding quickly and that it's simply becoming too costly to support a large chain of brick-and-mortar stores.

B&N had a leg up on Borders, but it appears to be going the same way now that the Nook is on the outs.

Another telltale sign is that Barnes & Noble has become focused on financial engineering.

In addition to the Nook news, it looks like the company plans to sell off its Sterling Publishing business, which focuses mostly on nonfiction titles. This was part of a $115 million acquisition back in 2003. However, it's unclear how much money a sale would get. The publishing business is under tremendous pressure because of soft demand in the U.S. and the low price points of e-books.

Even though the Nook is growing quickly -- at 70% during the holiday season -- it still might not get a premium valuation. The business continues to be a source of losses because of the huge necessary investments. Consider that Barnes & Noble projects pretax earnings of only $150 million to $180 million for fiscal 2012, and only last month the projections were for $210 million to $250 million.

And with the continued success of Apple's (AAPL) iPad as well as Amazon's dirt-cheap Kindle Fire tablet, it could be tough for the Nook to remain a sustainable business, even with its higher-horsepower Nook tablet.

So this really might be the end game for Barnes & Noble. The strategy seems to be to monetize the assets, then perhaps go private. From there, the company can starve investments in its stores and try to harvest the cash flows -- until the inevitable day comes when the retail business simply goes away.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of "All About Short Selling" and "All About Commodities". Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

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