No one wants to buy Barnes and Noble?

That’s what the Bloomberg news service said the other day, citing interviews with five (count ’em, five) unnamed sources knowledgeable about the auction of the company that’s now underway.  It appears potential buyers–at least seven, according to Bloomberg–have all lost interest as they have had an opportunity to study the company and its financials more deeply.

What could be their concerns?

Well, for one thing, BKS is a big-box retailer with a lot of real estate under lease that it has to pay for.  And big-box retailers are all trying to shed floor space as fast as they can.   They are suddenly realizing that this floor space has been rendered much less valuable by the rapid growth of online sales.

For another, BKS sells books, a merchandise category that is showing little, if any, growth.  In fact, the company most similar to BKS, Borders, has just gone into bankruptcy, illustrating the parlous state of the industry.  Potentially more relevant, Chapter 11 will likely allow Borders to free itself of many financial burdens and to streamline operations very quickly, presumably turning it into a much more formidable competitor as it reemerges from bankruptcy.

Finally, BKS is a force in internet sales, both of physical books and of e-volumes readable on the firm’s proprietary e-reader, the Nook.  While this puts BKS in a strong competitive position vs. Borders (which has neither kind of online presence), it also puts the company directly into the sights of two larger, much better capitalized, aggressive digital competitors in AMZN and AAPL.

That’s not good.

For one thing, a recent survey by the Boston Consulting Group suggests that, although digital is the future of publishing, most people want to buy tablets, not e-readers.  Score one for AAPL.  For another, the accord that the publishing industry forced on AMZN about a year ago compelled the e-tailing giant to stop competing on price in the digital book industry.  That didn’t mean competition in digital books ceased, as I think the publishers thought.  It just meant AMZN had to shift the focue of competition to another arena, namely, the price/performance of the e-reader.  At the moment, BKS’ color Nook may be in the lead.  But AMZN has much more R&D money to toss around than BKS.  Score one for AMZN.

Given my description, why would anyone even consider bidding for BKS?  A growth investor like me wouldn’t, even though I was a very big holder of BKS fifteen years or so ago.  But deep value investors are another breed entirely, with a very different–and somewhat counterintuitive–investment philosophy.

I look for healthy companies where I think the consensus has seriously underestimated their growth rate.  Deep value investors, on the other hand, look for mediocre companies, or worse, where they think the consensus has seriously overreacted to the bad news that’s in plain sight.  They hope to find assets worth 100 that they can buy for 30 and sell for, say, 60.  This is a tough business, where you’ve got to be very sharp to survive.  But it’s also one where the chance to acquire a company fitting my description above would have such investors rubbing their hands in anticipation.

To my mind, the surprise isn’t that value investors have started to investigate.  It’s that they’ve apparently all lost interest.  This implies they’ve found something in doing their due diligence that wouldn’t be obvious from the SEC filings and that makes them think the situation is riskier than they had imagined it would be.

What would such a risk be?  In my experience, deep value investors are most comfortable with mature businesses.  They tend to like basic industries (like cement or pulp and paper) and simple manufacturing, where the world changes slowly.  They also tend not to like, or to do well with, technology.

So I think their new-found worries come in the digital side of BKS …that once they peeked under the hood they concluded that BKS is in a more fragile condition there than they had estimated.  My guess is that the bone of contention is the cost/market position of the Nook, not the state of actual e-book sales.  The auction is supposed to be over in a couple of weeks.  We may learn more then.

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