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Reading Into barnesandnoble.com's IPO

The first time barnesandnoble.com made its attempt at going public it filed in September 1998 as Internet stocks were coming off a hot July. The proceed talk then was $100 million.

This time around the book etailer may try and peek out into the market at a time when Internet stock offers have lost some of their luster again, yet may seek $300 million.

It's not barnesandnoble's fault, blame it on the glut of Internet issues that filed, well over 100 in the past quarter alone. I've seen the pattern before: a few Internet IPOs rocket out the gate and then every .com rushes to file.

That is often followed by a demand shortfall as investors become more astute at picking real companies from the wannabes--and there are plenty of wannabes on file now to go public.

Let's check the chapter and verse on barnesandnoble.com's IPO plans, which as you can see doesn't seem out of line with rival Amazon.com's multiple.

Shares offered 25
Target price $ 12.00
Proceeds $ 300.00
   
Est. market value $1,666.67
   
1998 sales $ 61.83
Est. 1999 sales $ 100.00
   
99 revenue multiple 17
Trailing 27
Amazon's  
multiple 20

I allocate a fairly aggressive growth rate on barnesandnoble.com's sales although I estimate barnesandnoble.com posting only 9% of the sales of Amazon this year. That highlights the fact that Amazon.com to me is more than a rival to barnesandnoble.com, Amazon's greater product lines for sale give it girth at a time when girth may be all any of the two have or could want.

Of the possible $300 million gross proceeds barnesandnoble.com has entered agreements with AOL to sell books on AOL. That deal cost barnesandnoble.com $40 million in the years 1998-2001 with the payment schedule $8m in 1998, $10m in 1999, $11m in both years 2000 and 2001.

barnesandnoble.com also must pay MSN $3m as part of an agreement with Microsoft (plus a percentage of revenue). There's also a $4.5m agreement with per year through 2000 with Lycos.

These deals and others, as well as the higher cost of marketing, are behind the IPO target to raise $300m vs. $100m. Bertelsmann ons about 50% of barnesandnoble.com and has kicked in some capital to help the effort in a deal announced last year.

Pros: Bertelsmann and Barnes & Noble (the parent company) both have substantial resources and capital to market and grow the barnesandnoble.com service and brand.

Cons: Another spinoff stock from an established giant is not a pure pure play. Losses are a concern as barnesandnoble.com spends heavily to try and catch even the tailwind of Amazon.com. barnesandnoble.com had $83 million loss in 1998.

Overall: if barnesandnoble.com can sustain a valuation in line with its sales to sales percentage of Amazon it could find a $2 billion market cap rather quickly after IPO, giving it 26% to run in. It may do better if the more conservative investors are drawn to barnesandnoble.com's lineage and deep pocket partners/owners.

Until it goes though barnesandnoble.com's IPO is still a unfinished manuscript looking for a market receptive to its plot.


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