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Bertelsmann Lets Go of BarnesandNoble.com

When Barnes & Noble and Bertlesmann AG decided to set up its online venture, they had every intention of cutting into Amazon.com's lead in the online bookselling market.

Now Bertelsmann, facing its own financial pressures and new strategic direction, has decided to sell its stake in the barnesandnoble.com venture back to Barnes & Noble for $164 million. The move is expected to cut into Barnes & Noble's profit estimates for the rest of 2003 by 11 cents per share.

Barnes & Noble said it would pay $2.80 for each Bertelsmann share in barnesandnoble.com , which is a 37 percent premium over the stock's Tuesday closing price of $2.04. On Wednesday, shares of barnesandnoble.com were up nearly ten percent in midday trading. The deal is expected to close within the next 45 days.

Bertelsmann appears to have taken a financial bath, and essentially played a major role in the financing and development of the barnesandnoble.com brand.

The German media giant paid $200 million to get into the venture, and said it would spend another $100 million in marketing. How much of those funds were actually allocated to the venture is unclear.

In September 2002, Bertelsmann said it was exiting its e-commerce ventures and focusing exclusively on its global book and music business. Bertelsmann chose to abandon its previously ambitious Internet strategy and dumped its former CEO Thomas Middlehoff.

While its venture with AOL Time Warner in AOL Europe has been one bright spot for the company's Internet fortunes, its acquisition of Napster in 2002 was an unmitigated disaster. The Napster acquisition never amounted to anything, and the deal continues to haunt the company in the form of an ongoing $17 billion dollar lawsuit against it.

Bertelsmann controlled a 36.8 percent stake in barnesandnoble.com after making its major investment in 1998. Now, Barnes & Noble has the entire online media venture on its books, and in a statement said its expects barnesandnoble.com to generate positive cash flow in the fourth quarter of 2003, and into 2004.

But while barnesandnoble.com recently reported a narrower loss in the second quarter, it was from cutting expenses, and not expanding its market share in the sales of books, music or movies versus the leading online media retailer: Amazon.com.

In a press release, Barnes & Noble said the deal to acquire the German media company's shares in the joint venture was with DirectGroup Bertelsmann, the company's "direct-to-consumer division."

Barnes & Noble said it expects the transaction to reduce estimates for earnings per share (EPS) by approximately $0.11 for the balance of the fiscal year, ending January 31, 2004.

Barnesandnoble.com recently reported its financial results for the second quarter and said its net loss was $14.2 million, or 9 cents a share versus $20.6 million, or 13 cents a share, a year earlier. The company had expected it would post a loss in a range of 10 cents to 12 cents per share.

The company's net sales were $86.5 million, up from $85.8 million in the prior year and above its expectations of between $80 million and $85 million. Total operating expenses in its second quarter dropped 14.1 percent from a year ago.

In its forecast of the future, the company said expects to post a third-quarter loss of between 8 cents and 10 cents per share. For the year, the company sees a loss of between 28 cents and 32 cents per share, with sales expected to be between $415 million to $450 million.