BREAKINGVIEWS - Microsoft gives Barnes & Noble a big brother lift

NEW YORK Tue May 1, 2012 1:04am IST

The Nook Tablet is seen during a demonstration at the Union Square Barnes & Noble in New York, November 7, 2011. REUTERS/Shannon Stapleton/Files

The Nook Tablet is seen during a demonstration at the Union Square Barnes & Noble in New York, November 7, 2011.

Credit: Reuters/Shannon Stapleton/Files

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NEW YORK (Reuters Breakingviews) - Microsoft (MSFT.O) has given Barnes & Noble (BKS.N) a big brother lift. The bookseller's Nook e-book reader ambitions looked a day late and many dollars short. Microsoft's $300 million injection changes that and is more than a one-time hand up.

Barnes & Noble said in January that it might separate its fast-growing Nook business from its ailing bricks-and-mortar stores. Figuring out how to do the split wasn't straightforward, however. The online division, which bears the cost of developing the Nook, lost $102 million last quarter. Moreover, e-reader sales are heavily promoted in stores.

The new agreement with software giant Microsoft carves a trail. The software giant gets a 17.6 percent stake in the company's Nook and college business units, valuing that part of Barnes & Noble at $1.7 billion. The book retailer's entire market capitalization before the deal was unveiled was less than half this figure.

The Nook is gaining customers and now has almost 30 percent of the e-book market. Microsoft's cash, and revenue guarantees for several years, provide the financial resources to go additional rounds against rivals like Amazon (AMZN.O) and Apple (AAPL.O). But Barnes & Noble's new big brother is also going to put the Nook app on devices running its newest operating system, Windows 8, which is due out later this year. That's a big potential boost.

It's no surprise Barnes & Noble's shares popped more than 60 percent on the news. But it's worth noting the whole company's value, even after adding back $100 million of long-term debt, is still below the valuation implied by Microsoft's investment in part of it.

One worry is competitive, even with extra cash in Barnes & Noble's pocket. Apple and Amazon have far more, as well as formidable market clout in e-readers and e-books. Apple is focused on the textbook market, too. On the technological front, Barnes & Noble could face pressure to risk switching the Nook from Google's (GOOG.O) Android operating system to Microsoft's. And the declining high-street store business will continue to dwindle, to the sadness of fans of real bookstores.

All that means Barnes & Noble's struggles aren't over. But the Microsoft deal does bring the company time, capital and a path to follow.

CONTEXT NEWS

- Microsoft said on April 30 that it would purchase a 17.6 percent stake in Barnes & Noble's Nook and college businesses for $300 million. Barnes & Noble will retain the remaining 82.4 percent. The bookstore and publishing firm said in January it was considering separating its Nook business from its remaining operations.

- Additionally, devices running Windows 8, Microsoft's newest operating system coming out later this year, will contain the Nook app. Microsoft will also guarantee $60 million a year in revenue to the Barnes & Noble unit for the next three years and $25 million per year over the next five years to help the unit expand its operations.

- Company statement: link.reuters.com/fav87s

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Martin Langfield)

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