A proposal for Amazon to acquire Barnes and Noble

1. PITCH BOOKPITCH BOOK
FOR PROPOSED ACQUISITION OFFOR PROPOSED ACQUISITION OF
BARNES & NOBLE INC.BARNES & NOBLE INC.
BY AMAZON.COM, INC.BY AMAZON.COM, INC.
By Menghan Li, Haoyuan Mai, Trishala Rasya, Peiyu Song, Gefei Zhang

2. Amazon
Barnes &
Noble
OFFER PRICE – $14.78
PREMIUM – 19.02%
400 Stores
240 Stores
Amazon
(640 Stores)
Grocery stores
Bookstores

3. Term
Sheet
Purchase Price
Total Deal Size $ 1,074,376,401.12
Implied Price per Share $14.78
Cap $ 27.33 per share
Floor $ 12.42 per share
Accounting Issues
Consideration 100% Cash
Tax Considerations Taxable to BKS shareholders
Synergy Value $ 18.41 per share ($1,338,038,800)

4. Term
Sheet
Transaction Process Requirements
Termination Penalties 91.17 Million (10% of Synergy gained by Amazon)
Other No Shop Clause
Transaction Date First day of Fiscal 2017
Social Issues
Organization Structure Barnes & Noble integrates into Amazon
Executives Some of the top executives should be retained
Headquarters Maintain both headquarters
Name Retain “Barnes & Noble” name for the bookstores
Reduction in Workforce No, Training and development of current workforce will be required

5. Why Amazon?
 Barnes and Noble is a good strategic fit for Amazon’s future plans.
 Since Amazon is a strategic buyer, it may be willing to offer higher
premium to Barnes and Noble shareholders

6. Revenue Growth
Deal Rationale – Revenue
Synergy
Improved market reach

7. Savings from employee training
and location selection
Deal Rationale – Cost
Synergy
Improved logistics
Greater bargaining and
negotiating power
Sharing Technology

8. Business Description –
Amazon.com, Inc.
 Ticker: AMZN (NasdaqGS)
 Headquarters: Seattle
 Year Founded: 1994
 Segments:
 North America
 International
 Amazon Web Services (AWS)
Source: Annual Report and IBISWorld

9. Business Description –
Amazon.com, Inc.
Source: Annual Report and IBISWorld

10. Business Description – Barnes &
Noble, Inc.
 Ticker: BKS (NYSE)
 Headquarters: New York City
 Year Founded: 1986
 Segments:
 B&N Retail: bookstores, eCommerce Website,
publishing operation (Sterling Publishing)
 NOOK: eBook store, digital newsstand and sales
of NOOK devices and accessories
Source: Annual Report and IBISWorld

11. Business Description – Barnes &
Noble, Inc.
Source: Annual Report and IBISWorld

12. Share Pricing & Index Value
B&N - 6.43%
Amazon 98.22%
S&P 500 25.35%

13. Industry Overview – Book Stores
in the US
 This Industry Is Declining
Revenue grows slower than economy
Falling number of book stores
Little technology change
Stable products and brands
Source: Annual Report and IBISWorld

14. Industry Overview – Book Stores
in the US
• Competition
Concentration in this industry is medium
Strong external competition from e-commerce
Fierce price competition in the industry
• Competitive Companies: Barnes & Noble
Education Inc., Follett Higher Education Group,
Books-A-Million, Powell’s Books
Source: Annual Report and IBISWorld

15. Industry Overview – Warehouse Clubs &
Supercenters in the US
 This Industry Is Continue Expanding
Continue to benefit from anticipated
improvements in the general economy
Incur large purchase costs from
transportation
Rising competition
Source: Annual Report and IBISWorld

16. Industry Overview – Warehouse Clubs &
Supercenters in the US
• Competition
Lose customers to online retailers
Continue opening new facilities
• Competitive Companies: Walmart, Costco
Wholesale Corp., Meijer Inc., Target Corporation, BJ’s
Wholesale Club Inc.
Source: Annual Report and IBISWorld

17. Comparable
Companies
Scholastic Corporation Chegg, Inc.
John Wiley & Sons, Inc. Indigo Books & Music Inc.

18. Scholastic Corporation
Publish and distribute children’s books
worldwide
Operation segments: Children’s Book
Publishing and Distribution, Education, and
International
John Wiley & Sons, Inc.
Provide knowledge and knowledge-
enabled service
Research segment: books, scientific,
technical, medical, and scholarly
research journals
Chegg, Inc.
Operate student-first connected
learning platform
Offer print textbook and eTextbook library for
rent and sale
Indigo Books & Music Inc.
A physical bookstore that operates book,
gift, and specialty toy retailer in Canada.
Offer kids and baby, paper, stationery,
electronic products and travel accessories.
Comparable
Companies

19. Trading
Multiples
Source: Capital IQ
*
See Exhibit 1

20. Transaction
Multiples*
*
See Exhibit 2 Source: Capital IQ

21. DCF Assumptions
Criteria Barnes & Noble Amazon
Weights 63% 38%
Steady State growth 1.5% 1.5%
Tax Rate 35.0% 37.0%
Cost of equity 13.7% 10.4%
WACC 13.3% 10.2%
Column1 Column2
Combined WACC 12.2%
Combined Steady state growth 1.5%
Combined Capitalization rate 10.7%
BestBase
Wors
t
*
See Exhibits 5 and 6

22. DCF Scenario Analysis
*
See Exhibits 3, 4, 5 and 6

23. Valuation Summary

24. DCF Sensitivity Analysis
Sensitivity based on 30% variation from the base case.
*
See Exhibit 7

25. Sensitivity Analysis on Capital Expenditure
and D&A
*
See Exhibit 7

26. Risks
 Revenue growth will depend on Amazon’s ability to rebrand itself as a brick and mortar
store (both bookstores and grocery stores)
 Understated capital expenditure
 Cannibalization of sales
 Integration risk and Operating risk
 Differences between industry and management
 Inventory Risk
 Seasonality
 Competition
 Economic environment
 Consumer spending patterns

27. Bidding Strategy
$8.92
$12.42
$14.78
$27.33
BKS Standalone Market Price Market Price+19% Premium
* Standalone + Synergies
* The average premium of transactions
in retail industry (Publication)
68% Synergies ($12.54) AMZN32% Synergies ($5.86) BKS
*
See Exhibit 3-6

28. Exhibit 1: Trading multiples

29. Exhibit 2 : Comparison of Selected Mergers and Acquisitions

30. Exhibit 3: Standalone Free Cash flows to Equity
Source – Barnes & Noble 10K

31. Exhibit 4 : Standalone DCF Valuation
Source – Barnes & Noble 10K
Source
Source
Source
Source

32. Exhibit 5 : Standalone + Synergies Free Cash flows to equity
Source – Barnes & Noble 10K

33. Exhibit 6 : Standalone + Synergies DCF Valuation
Source – Barnes & Noble 10K, Amazon 10K

34. Exhibit 7: Sensitivity Analysis on Different Synergy
Assumptions
Sensitivity on Capital expenditure Sensitivity on Selling and administrative Sensitivity on steady growth rate
Capex increase as
revenue $ 27.33 Decrease in SG&A $ 27.33 Steady growth rate $ 27.33
3.50% $ 45.67 2.10% $ 22.25 1% $ 27.02
4.00% $ 39.55 2.40% $ 23.94 2% $ 27.65
4.50% $ 33.44 2.70% $ 25.64 3% $ 28.36
5.00% $ 27.33 3.00% $ 27.33 4% $ 29.17
5.50% $ 21.21 3.30% $ 29.02 5% $ 30.10
6.00% $ 15.10 3.60% $ 30.71 6% $ 31.17
6.50% $ 8.99 3.90% $ 32.40 7% $ 32.43
Sensitivity on Cost of Gods sold Sensitivity on Capital D&A Sensitivity on Revenue growth
Decrease in COGS $ 27.33 D&A increase as PPE $ 27.33 Growth rate $ 27.33
2.10% $ 22.25 7.00% $ 14.49 3.50% $ 32.46
2.40% $ 23.94 7.86% $ 18.15 4.00% $ 30.90
2.70% $ 25.64 8.71% $ 21.82 4.50% $ 29.19
3.00% $ 27.33 9.57% $ 25.49 5.00% $ 27.33
3.30% $ 29.02 10.43% $ 29.16 5.50% $ 25.28
3.60% $ 30.71 11.29% $ 32.83 6.00% $ 23.05
3.90% $ 32.40 13.00% $ 40.17 6.50% $ 20.60