Liberty Media Corp.'s (LCAPA, LINTA, LSTZA) bid for Barnes & Noble Inc. (BKS) could open a new chapter for the media conglomerate in the bookstore business, a departure from its heavy concentration on television and e-commerce investments.

The deal, which values Barnes & Noble at $1.02 billion, also would be consistent with the modus operandi of Liberty's chairman and controlling shareholder, John Malone, who has made a fortune, in part, by investing in companies left for dead by many investors, only to prove they have life left. In this case, Barnes & Noble's key lifeline would be its electronic reader, the Nook, and the growing electronic-book market.

However, the offer also seems to lack some key attributes that Liberty is known for pursuing in an acquisition target, namely substantial tax assets or healthy cash flows. Citigroup Investment Research estimates Barnes & Noble's annual free cash flow at just $65 million a year. The deal's critics also point to the decline in the traditional book business.

Nonetheless, the bid certainly has energized Barnes & Noble's stock, which has surged more than 30% Friday to $18.45, above the bid's per-share value of $17.

The jump in stock price is likely due to the scrambling done by investors who had been betting that Barnes & Noble's stock would fall. More than half of Barnes & Noble's float was sold short, meaning those shares produce profits when the stock price falls. Also propping up the stock may be the hope that Liberty would raise its offer.

Liberty representatives couldn't be reached for further comment Friday, and Barnes & Noble declined to comment beyond its own press release. Barnes & Noble, under pressure from dissident shareholder Ron Burkle's Yucaipa Cos., put itself up for sale in August but reported no progress in attracting a suitor until Thursday evening.

In a press release Thursday, Liberty expressed confidence in the bookseller's management team and said the company is the "established leader in bookselling and is at the forefront of the transition to digital." The offer, which also includes the assumption of about $450 million in debt, would give the Liberty Capital group a 70% stake in the company, while Barnes & Noble founder Leonard Riggio would retain his 30% stake and remain at the company.

However, with the bookstore business facing tough pressure from the rise of online retailing and electronic book selling, observers were baffled by Liberty's move. Citigroup said the deal's "immediate financial merits seem limited." The firm pinned Liberty's long-term strategic rationale on a potential merger with smaller rival Borders Group, which filed for bankruptcy in February, or on the possible alliances with Liberty's various media and e-commerce assets.

Barnes & Noble's core bookstore business is considered less of a focus than its digital business. E-books are a $1 billion business in the U.S. and on pace to nearly triple year-over-year, Stifel Nicolaus said Friday, citing a Publishers Weekly article from last month. Barnes said the Nook reader is its best-selling product in its history, and rival Amazon.com Inc. (AMZN) said Thursday that sales of e-books on its website have now surpassed combined sales of hardcover and paperback books.

Barnes & Noble has plowed all of its cash flow, and then some, into its Nook brand of electronic-book readers to capture a quarter or more of a burgeoning e-book market, where Amazon's Kindle dominates most of the remaining share. Barnes recently suspended its once-lofty dividend to free up more money to invest in digital strategies.

Liberty may see an opportunity to bolster its foothold in the fast-growing e-book market and can add much-needed financial support to Barnes & Noble's position.

Malone, credited as a founding father of the cable TV business, is known as a savvy investor and tough dealmaker who has cobbled together a patchwork of businesses under the banner of his Liberty Media empire, including home shopping network QVC and premium cable network owner Starz Entertainment. His company rescued satellite radio giant Sirius XM Radio Inc. (SIRI) from bankruptcy with a $530 million investment in 2009 that is now valued at $3.5 billion.

Jeffrey Wlodarczak, analyst with Pivotal Research Group, said in Liberty's view, Barnes & Noble "essentially operates a monopoly business that may decline at a slower rate than anticipated by the market, with upside if the Nook, and related Internet businesses continue to generate strong growth, and they can improve operational efficiencies."

For its fiscal third quarter ended in late January, Barnes & Noble reported $170 million in earnings before interest, taxes, depreciation and amortization. The company recently suspended guidance but said in November it expected between $170 million and $205 million in Ebitda for the fiscal year, and the company set a goal last summer to achieve $500 million in annual Ebitda by 2014. That's roughly equal to the $500 million in cash Liberty said it would likely contribute to the deal.

By 2013, Barnes & Noble's website alone should generate annual revenues of $2.3 billion and produce profits of $95 million, Janney Capital Markets predicted in a note early this month.

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com; and Maxwell Murphy, 212-416-2171; maxwell.murphy@dowjones.com

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