* Microsoft to invest in B&N;’s digital, college units
* Deal values businesses at $1.7 bln
* Microsoft will own 17.6 pct of new subsidiary
* Barnes & Noble shares soar 67 pct; Microsoft stock flat
(Adds analyst comments, Barnes & Noble CEO comments, industry
details, updates stock prices)
By Phil Wahba
April 30 (Reuters) – Microsoft Corp will invest
$300 million in Barnes & Noble Inc’s Nook e-reader,
gaining a foothold in the fast-growing e-books market as the
bookseller gets more firepower to compete against Amazon.com’s
Kindle and Apple Inc’s iPad.
The move comes as Microsoft is looking to generate
excitement around its tablet-friendly Windows 8 operating
system, expected on the market around October.
The deal announced on Monday includes Microsoft taking a
stake in the bookseller’s college bookstore division. It also
means that the two companies have settled their patent dispute.
Shares of Barnes & Noble soared nearly 70 percent on Monday,
while Microsoft shares were nearly flat.
The agreement values the Nook and textbook businesses, which
will form a new subsidiary, at $1.7 billion.
“This is not a financial investment. It’s a strategic
investment to strengthen Windows 8 as a platform for tablets and
e-reading,” said BGC Partners analyst Colin Gillis.
Barnes & Noble gets a much-needed capital injection and a
way to enter the digital books market outside the United States.
Microsoft will receive a 17.6 percent stake in the new
company, temporarily called Newco. It will be run by Barnes &
Noble and will maintain a relationship with the U.S. bookstore
chain’s nearly 700 stores.
Barnes & Noble’s Nook has found a strong following, allowing
it to garner some 27 percent of the U.S. e-books market in the
2-1/2 years since the device was launched. But battling Amazon’s
market-leading Kindle has proved expensive.
“It gives them a much larger partner with deeper pockets, it
gives them increased reach,” said Morningstar analyst Peter
Wahlstrom. “In the last two years they’ve had their backs
against the wall.”
Last year, Barnes & Noble suspended its dividend to have
more cash to develop Nook. In January, it lowered its sales and
profit forecasts.
The companies also said on Monday that they have settled
their patent litigation. Last year, Microsoft filed lawsuits for
patent infringement against Barnes & Noble over the Nook in part
of its assault on devices running on Google Inc’s
Android system.
NOOK TO GO GLOBAL
Barnes & Noble has poured tens of millions of dollars into
developing the Nook. The first version hit the market in 2009,
two years after the Kindle.
The company’s e-readers, tablets and electronic book sales
have helped it offset a broader decline in book sales.
Same-store sales of books at its brick-and-mortar stores have
edged up again largely thanks to the bankruptcy last year of
Borders Group.
But the Nook has been available only in the United States
and the company said last year it wanted to take its digital
business to new markets.
Barnes & Noble’s CEO, William Lynch, told analysts on a
conference call Microsoft’s reach would help in that regard.
“We will have the opportunity to collaborate on developing
best-in-class reading technologies for those Windows users and
extend the digital bookstore to hundreds of millions of people
in the U.S. and internationally,” he said.
The company had said in January that it might spin off its
digital business, which includes the Nook, ar guing that
investors were not giving the company enough credit for that
growth. [ ID:nL1E80401F]
The company did not say on Monday if it would take the new
company public.
Barnes & Noble put itself up for sale in 2010 but attracted
only one firm offer – a bid for $17 per share, or $1 billion,
last May, from Liberty Media, which was drawn by the
Nook’s growth.
Liberty ultimately decided to invest $204 million rather
than buy the company outright. It now has preferred shares it
can convert into a 16.6 percent stake in Barnes & Noble at a
strike price of $17. A spokeswoman for Liberty Media was not
immediately available for comment.
Some 71 percent of Barnes & Noble is held by its top four
shareholders, making the stock’s moves more volatile. It is also
one of the New York Stock Exchange listed shares with the
highest short interest, adding to their jumpiness.
Barnes & Noble shares were up 67 percent at $22.85 late on
Monday morning. The company was valued at just above $823
million at Friday’s close.
Microsoft shares were unchanged at $31.98.
(Reporting by Phil Wahba, Martinne Geller and Sinead Carew in
New York; Additional reporting by Mihir Dalal in Bangalore;
Editing by Lisa Von Ahn, Maureen Bavdek, Dave Zimmerman and
Matthew Lewis)
