JANA Partners Discloses Barnes & Noble (BKS) Stake ~ market folly

Monday, April 23, 2012

JANA Partners Discloses Barnes & Noble (BKS) Stake

Barry Rosenstein's event-driven hedge fund JANA Partners filed a Form 3 with the SEC regarding shares of Barnes & Noble (BKS). Per the filing, the hedge fund has revealed almost a 7 million share position in BKS.

This is a brand new position for JANA as they did not own shares at 2011 year-end. BKS was up over 18% today as investors speculated the activist investor would push the company to split up. After all, JANA recently pushed for McGraw-Hill to split up.

However, the hedge fund has only filed a passive 13G with the SEC at this time, disclosing their 11.6% ownership stake in the company. If they were pursuing activism, they would have filed a 13D.

In the Form 3, JANA also disclosed "put options (obligation to buy)" representing 250,000 shares with an exercise date of May 18th, 2012 and a strike price of $13. We've quoted the above from the filing because it's caused a bit of confusion.

In the traditional definition of buying options, puts are the right, but not obligation, to sell shares. They've written "obligation to buy" instead on the Form 3. So, this could mean 1 of 2 things: they either sold the puts or they meant to write "calls (obligation to buy)."

Both are essentially bullish bets so it's just technicalities. We've sent an inquiry to JANA.

If they sold puts, that means they're more than likely willing to buy more shares at the $13 pricepoint. This would be the first time we've ever seen a fund disclose the sale of options, as usually they only disclose when they purchase calls or puts.

And if they actually bought calls, they most likely bought them when they were out of the money (due to the $13 strike). On the big surge today due to the news of JANA's stake, these calls (if that's what they meant) are now in the money. We hope to get clarification from them about this, but either way it seems to be a bullish wager.

BKS Top Holders

This is an interesting shake-up in terms of ownership stakes. Billionaire Ron Burkle owns a sizable stake in BKS, as does John Malone's Liberty Media (LMCA). (Interestingly, JANA also owned a chunk of LMCA shares as of the end of 2011).

Almost a year ago, Liberty made an offer to acquire BKS for $17 per share in cash, but the two eventually settled on BKS selling Liberty $204 million in convertible preferred bonds.

Other top hedge fund holders of BKS on record as of December 31st, 2011 include Balyasney Asset Management and Citadel.

Conversely, Mick McGuire's Marcato Capital had previously disclosed a sizable put position in Barnes & Noble. Whitney Tilson's T2 Partners has also been short BKS.

Bulls Versus Bears

The bulls point to Barnes & Noble's Nook e-reader segment as attractive. Some analysts believed that's what John Malone's company targeted in the first place and others have postured that JANA might push for a split up of the company.

Bears obviously point to the fact that it's no secret physical booksellers are facing heat in the form of a) competition from cheaper prices from Amazon.com (AMZN) and b) the digitilization of the publishing industry as books convert into e-books.

Barnes & Noble's primary brick and mortar competitor in this arena, Border's, filed for bankruptcy. BKS is looking to avoid the same fate and it looks like some investors are eying the e-book segment.

It will be interesting to see what happens given that BKS has been a favorite short of various hedge funds, but you also have potential activists involved (JANA) and potential buyers that have demonstrated their interest (Liberty) on the long side.

For more of our coverage of this hedge fund, head to JANA's presentation on MHP.

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