Here’s the Value Behind Pearson’s Nook Investment

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Shares of Barnes & Noble (NYSE:BKS) jumped as much as 9.7 percent in morning trading before simmering down to 5.5 percent following news that Pearson (NYSE:PSO) will invest $89.5 million in NOOK Media in exchange for a 5 percent stake.

That’s a pretty big endorsement for a loss-making division…Nook HD+

The company’s fiscal 2013 second-quarter financial release reveals that NOOK segment revenues grew 6 percent year-over-year to $160 million, but EBITA losses also grew 1 percent year-over-year to $51.4 million. Revenue was led by digital content sales, which were up 38 percent year-over-year, while margin improvements were offset by investments in product development.

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Those product development costs may be a sticky spot for the NOOK division. Barnes & Noble is part of the highly-competitive tablet market along with Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Amazon.com (NASDAQ:AMZN), all of which have more cash on hand than Barnes & Noble’s total cash and equivalents figure from last quarter of $470.9 million.

That being said, Pearson’s investment values the NOOK division at about $1.79 billion, 5.3 percent higher than what Microsoft’s (NASDAQ:MSFT) $300 million investment valued the division at. Microsoft owns a 16.8 percent in NOOK Media.

Close readers will notice that the NOOK division alone is valued at nearly twice Barnes & Noble’s market cap. With their powers combined — excluding long-term debt and including adjusted cash — the whole company is worth about $2.5 billion. Still just pocket change compared to the other tablet players, but Pearson’s strategic investment in the division isn’t banking on the success of the company’s hardware. Rather, the division’s value is in its digital content expertise…

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