December 7, 2013 12:00 am

Regulators look at Barnes & Noble books

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FILE - FEBRUARY 25, 2013: It was reported that Barnes & Noble CEO Leonard Riggio intends to make an offer for Barnes & Noble Booksellers, barnesandnoble.com and other retail assets February 25, 2013. CHICAGO, IL - APRIL 30: People walk by the entrance to a Barnes & Noble store on April 30, 2012 in Chicago, Illinois. Barnes & Noble plans to spin off its digital business, which includes its Nook e-reader, and partner with Microsoft and to form a new business called Newco. With a $300 million investment, Microsoft Inc. will own a 17.6 percent stake in the new unit.©Getty

Barnes & Noble shares plunged by 12 per cent on Friday as news of a regulatory probe into its accounting sparked investor worries over the book retailer’s ability to sell its digital business.

The chain said that the US Securities and Exchange Commission had begun an investigation into an allegation by a former employee that it “improperly allocated” some technology expenses between its digital and bricks-and-mortar business.

Analysts have said that Barnes & Noble’s Nook digital business – which includes ebooks, ereaders and tablet computers – could be divested from its bricks-and-mortar stores. That possibility had helped to prop up the company’s share price.

Rather than becoming a standalone business, analysts say the more probable outcome is that the Nook business will be bought by a hardware or content company, but even before Friday’s disclosures the Nook business had deteriorated in recent months.

David Schick, analyst at Stifel Nicolaus, said the ebook market was less attractive than it once was because sales growth has slowed and Apple and Google have increased their investments in the sector, alongside the market leader, Amazon.

In the quarter to October 26, the Nook business reported a 32 per cent year-on-year fall in sales to $109m and a loss before interest, tax, depreciation and amortisation of $45m, although the loss was slightly smaller than in the previous year.

Barnes & Noble said on Friday that the SEC had begun an investigation into “a former non-executive employee’s allegation that the company improperly allocated certain Information Technology expenses between its Nook and Retail segments for purposes of segment reporting”.

In addition, it said the probe concerned the company’s restatement of earnings announced on July 29 2013. A company spokeswoman said: “We are co-operating with the SEC, including responding to questions and requests for documents.”

The news sent its shares down to $14.43.

Even though Barnes & Noble is now the US’s only national book chain following the demise of Borders in 2011, it is still struggling to secure its future in the era of ecommerce and digital media.

Speculation about a company split was stoked in July by Barnes & Noble’s decision not to replace its outgoing chief executive, William Lynch, but instead to appoint two separate leaders for its book stores and digital business.

Barnes & Noble had ploughed millions of dollars of capital into Nook. Mr Schick, the analyst, said the most logical buyer for the business would be a hardware company that already had some of the expertise it needed.

“The real value would be in finding somebody to bring to the table all the things Nook had to invest in,” he said.

Barnes & Noble has not previously said that it wants to sell the business and it did not respond to a request for comment on its intentions.

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