Pearson Invests $89.5 Million In Nook Media, After Disappointing Holiday

Nook Media--the entity formed in 2012 that owns Barnes & Noble's Nook business and their college bookstores--has its second major strategic investor, joining Microsoft: As of December 21 Pearson agreed to invest $89.5 in cash for a 5 percent equity stake. The bookseller paired an announcement about that investment with a preview of holiday sales that indicates "results will be below expectations" and Nook in particular will not meet their previous projections for the fiscal year.

Perhaps because of that performance, Pearson is buying in to Nook Media at essentially the same the valuation given to the company when Microsoft paid $300 million for a 17.6 percent stake (which was $1.7 billion) plus the value of Pearson's cash, for a "post-money valuation of approximately $1.789 billion." That leaves Barnes & Noble with a 78.2 percent share and Microsoft with a 16.8 percent stake in Nook Media. Pearson also will get warrants to purchase up to an additional five percent "under certain conditions," at the same valuation. Perhaps just as importantly, "at closing, Nook Media and Pearson will be also entering into a commercial agreement with respect to distributing Pearson content in connection with this strategic investment." (No further details are provided; that likely refers primarily to digital textbooks, but could also apply to print textbooks through the BN College stores.)

News of this new partnership, however, is balanced by a warning of weaker than expected performance over the holidays, for Nook in particular and potentially the entire Barnes & Noble business. The warning was contained in the company's SEC filing about the investment, but was not mentioned in the press release: It says they will announce holiday sales on January 3 and "based on preliminary sales results to date in the holiday period and sales trends, the company expects its holiday sales results will be below expectations and that the Nook business will not meet the company's prior projection for fiscal year 2013." When BN reported quarterly earnings in late November, Nook segment sales of $160 million were well below analysts expectations of $191 million and raised fresh concerns about the growth trajectory of the Nook business in the face of intensifying competition.

With the Pearson alliance you see the value and intention of pairing the college bookstores with the digital reading business--which has significant potential when allied with the world's largest textbook publisher. (And yes, this investment is about the core business that drives Pearson, rather than the trade publishing interest in Penguin that is slated to become part of a jointly-owned company with Bertelsmann.) Pearson North America ceo Will Ethridge says in the announcement, "With this investment we have entered into a commercial agreement with Nook Media that will allow our two companies to work closely together in order to create a more seamless and effective experience for students. It is another example of our strategy of making our content and services broadly available to students and faculty through a wide range of distribution partners."

Barnes & Noble ceo William Lynch adds in the release, "We welcome their partnership in Nook Media, and look forward to working with them and Microsoft to deliver great digital experiences for our shared customers." Pearson shares were down slightly in early trading in London Friday morning. While the investment has significant strategic potential for both partners, it's a small sum for Pearson (just as Microsoft's investment was small for them). After a steady decline since early December, Barnes & Noble's shares moved higher in early trading, up oer $1 a share in the first hour--though as we noted, the disappointing holiday forecast was not highlighted in the press release. And even with that movement, investors still value the bookseller far less than the partners in Nook Media--Barnes & Noble says its stake in that entity alone is still worth $1.4 billion, but the parent company's entire market capitalization remains about $900 million.