The letter from Rick Schottenfeld, Chairman an CEO of Schottenfeld Group Holdings, was distributed via press release with a news-style ‘analysis’ of the letter that was picked up uncritically by many news sources. We have not been able to find any filing with the SEC.
Though Schottenfeld claims that “I am the chairman of Schottenfeld Group Holdings. Primarily through our subsidiary Koyote Capital, we have a significant ownership interest in Barnes and Noble, Inc. (the “Company”),” we can find no evidence of a BKS stake in any public filing, meaning, at the very least, that any stake is below 5%.
The rest of Schottenfeld’s letter basically states that these are two competing business which could operate more effectively as distinct entities. He is pleased with the value of the Nook business while simultaneously decrying the company’s decision to invest in it. And then he gives us the following gem of bad math and logic:
The approximately $900,000,000 the Company has lost or invested in this business over that period represents almost $13 per share which is near today’s current share price. We believe there were much better uses for our cash flow over this period. For example, had the Company instead initiated a stock buy-back plan (using the volume weighted average price over the last three years of $15.40) the Company could have repurchased approximately 82% of its current shares outstanding. Alternatively, had the Company initiated a dividend, the stock could have yielded over 25% for that same time frame. It is clear to us, and we believe to any other rational investors, that either of these strategies would have created more value for shareholders.
The presumption that the company would have been able to purchase 82% of its shares at the current price without impacting the share price or financials significantly is ludicrous. Likewise, without this investment, the Nook division, which has been an important growth driver and has garnered hundreds of millions in outside investment, would not have existed. Despite Schottenfeld’s protests that this is a dysfunctional company competing with itself, the floor space to sell digital devices as well as the leverage the company has with publishers to get them onto the e-book platform has been critical to Nook’s success, and it is not clear that it is unimportant going forward. In fact, Schottenfeld’s main thrust is that the value is in the stores, not in the nook business- the opposite of the approach most analysts have taken
The company may well choose to split the two companies. If they do, however, we are certain that it won’t be on account of Mr. Schottenfeld and his astonishingly invisible stake.
Disclosure: The author holds no position in any stock mentioned.