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What’s Barnes & Noble’s founder up to?

Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.

The continuing melodrama at Barnes & Noble Inc. is a page-turner. But wise readers will keep Leonard Riggio, founder, chairman and largest shareholder of the U.S. bookseller, in mind even while the Microsoft rumours percolate. A report last week had Microsoft – already an investor in Nook (Pearson, parent of FT, is also an investor) – preparing to acquire the digital business for $1-billion (U.S.), only for a subsequent report to dismiss an imminent offer. Mr. Riggio though lurks in the background; He expressed interest in acquiring the Barnes's physical stores in February. Since then little has been heard about the details of his offer but upcoming fourth-quarter results are the perfect place to start the company's next chapter.

Mr. Riggio stated in February that he was interested only acquiring the retail business representing 700 stores and about $5-billion of revenue in the last year. That leaves Nook Media as the stub he is not pursuing. Within Nook Media is the Nook digital business (ereaders, digital bookstore) as well as the college bookstore division which Barnes had acquired in 2009 for $600-million from Mr. Riggio himself. Barnes stock shot up 24 per cent to nearly $25 per share upon the Microsoft rumours. The plot holes needing to be plugged include what exactly is Microsoft interested in buying? Presumably not the college bookstores in Nook Media. And if Mr. Riggio takes the other retail assets than those the college assets would be a standalone entity again.

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What can investors be sure about at this juncture? Most important, there is a lot of untapped value at Barnes & Noble. If the digital side of Nook Media is worth $1-billion then applying a multiple range of 3 to 4 times Credit Suisse's estimated cash flow to the brick and college stores equals a value of above $30 to Barnes & Noble's share price. A handy benchmark when talks begin with Mr. Riggio over what he covets.

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