Struggling retailer Barnes & Nobel (NYSE:BKS) announced today that Microsoft Corp (NASDAQ:MSFT) will invest at last $650 million in the Company’s Nook digital-book business as it continues to try and make inroads against the rival Ipad and Kindle.
Microsoft will now gain a 17.6% stake in a new subsidiary for the Nook and Barne’s text business in a transaction that carries a $1.7 billion valuation. This compares to BKS’s current market cap of $791 million fueling the argument by some analysts that the digital business should be separated from the retail division.
Shares in BKS which have struggled in the last year surged as high as 68% following the announcement. Microsoft next operating system, windows 8 is being developed to run on both desktops and mobile devices like tablets and phones. The Company’s software share of the mobile sector is lagging behind Google and Apple and this appears to be the latest move to increase its user base in the sector. Last year Microsoft made a significant investment in Nokia.
In addition to a $300 million investment, Microsoft all pledged to hand out $180 million, or $60 million a year for three years to the subsidiary in the form of revenue sharing guarantees, according the the contract filed with the SEC on Monday.
Barnes & Noble will create an e-reading application for Microsoft-powered mobile devices and computers, and the companies will share revenue from sales of e-books and other content, according to the contract. Microsoft will make the $60 million annual payments as an advance to the subsidiary—dubbed NewCo—-in quarterly installments over three years.
Microsoft also pledged $25 million a year over five years, or $125 million, to assist in NewCo’s planned international expansion, according to the companies’ contract. The agreement says the money is earmarked to assist the Barnes & Noble business “in acquiring local reading content and technology development.”
As part of the Microsoft investment, the two parties have settled their patent litigation, and in the future, Barnes & Noble and the new subsidiary will have a royalty-bearing license under Microsoft’s patents for the Nook, the companies said.
Barnes & Noble in January said it was exploring a spin off of the Nook business. Monday it said it is still exploring how a separation of the subsidiary may occur but cautioned such a move may not happen. For the bookseller, the investment will mean access to more international markets, since Windows 8 is used across the globe. Currently, besides the Nook device, the Nook book-buying application is available only on iPad and Android devices.
Microsoft in February released a test version of Windows 8 to the public, along with a storefront that had roughly 100 apps. By contrast, there are more than 585,000 apps available for Apple’s operating system for the iPhone and iPad. The February preview of Microsoft Windows 8 app store featured Amazon’s Kindle app for reading electronic books.