Liberty said in its announcement about the potential transaction that its "proposal, which contemplates that the acquisition will be structured as a merger, is subject to various conditions, including satisfactory financing and the participation of founding chairman Leonard Riggio, both in terms of his continuing equity ownership and his continuing role in management. Liberty's equity ownership, which would be attributed to the Liberty Capital group, is expected to be approximately 70% of Barnes & Noble. Liberty expects that its cash contribution toward the purchase price, depending on the amount of financing that can be obtained, will be in the range of $500 million."
Barnes & Noble's board has had the firm on the block for almost a year, but recently suggested that it would continue on as a publicly traded company. Fund manager Ron Burkle waged an unsuccessful proxy war to take control of B&N in late 2010.
The bid by Malone is almost certainly based on Barnes & Noble's Nook, and its ability to effectively compete with Apple's (AAPL) iPad and Amazon's (AMZN) Kindle. The iPad, of course, dominates the tablet market and is a de facto e-reader, while the Kindle is the market share leader among dedicated e-readers. But Barnes & Noble recently made disclosures to the SEC which indicate it may have a new version of its Nook e-reader on the way. The filing said that the new product would be announced on May 24.
A bet on the new Nook may not be such a long one, although sales of its previous incarnations have been well behind those of the Kindle and iPad. Amazon recently said that its e-book sales have surpassed the sales of print books, outselling them by a ratio of 105 to 100 since the start of April.
Malone's offer is a gamble that the overall trend of Barnes & Noble's sales will improve sharply, probably via e-book sales, or that he can significantly cut the book retailer's costs. In its latest 10-Q, Barnes & Noble reported revenue of $2.33 billion for the quarter that ended Jan. 30, up a tick from $2.17 billion in the same period a year. Net income fell from $80 million to $60 million. Both figures stand in stark contrast to both the size and growth rate of Amazon's results. Also, Barnes & Noble's assets are dominated by inventory and building and lease-hold improvements. It only had $26 million in cash at the end of the quarter. That's just not much of a war chest to compete against the consumer electronics offerings of Apple and Amazon.
Barnes & Noble has over 1,300 stores. Malone may think some of these can be shuttered to improve margins. He can certainly hope to learn from the experience of rival bookstore chain Borders, which filed for bankruptcy in February and has had to close a large fraction of its outlets. Borders may now be sold off in pieces because no single buyer has expressed serious interest in the intact firm.
The business of operating physical bookstores is in an undeniable decline: Malone though, seems to be willing to bet $1 billion on the chance that he can increase Barnes & Noble's e-reader and e-book sales faster than its bricks-and-mortar sales run out.