By Phil Wahba
(Reuters) - Microsoft Corp has agreed to invest $300 million in Barnes & Noble Inc's Nook digital-book business and college texts, in a deal that helps establish the value of the popular Nook business while giving Microsoft a foothold in the e-book market.
Shares of Barnes & Noble nearly doubled in premarket trading after the deal was announced on Monday. The agreement values the Nook and textbook business at $1.7 billion, the companies said.
The deal gives Microsoft Corp a 17.6 percent stake in a new subsidiary for the business, a new company which will still have an existing relationship with Barnes & Noble's stores, the largest bookstore chain in the United States, the companies said.
The investment from Microsoft gives new firepower to Barnes & Noble, which has been engaged in an expensive battle with Amazon.com's market-leading Kindle as well as Apple Inc's iPad.
"It gives them a much larger partner with deeper pockets, it gives them increased reach," said Morningstar analyst Peter Wahlstrom. "In the last two years they've had their backs against the wall."
The companies have also settled their patent litigation. Last year, Microsoft filed lawsuits for patent infringement against Barnes & Noble over the Nook in part of its assault on devices running on Google Inc's Android system.
Barnes & Noble has poured tens of millions of dollars into developing the Nook. The first version hit the market in 2009, two years after the Kindle.
The company has often relied on e-readers, tablets and electronic books to offset shriveling sales at its brick-and-mortar stores. It has said it commands about 27 percent of the U.S. market for e-books and e-readers.
The company said in January that it might spin off its digital business, which includes the Nook.
Some on Wall Street see the Nook as a fast-growing technology asset trapped within a slower retail stock. They have theorized that Barnes & Noble would spin off the Nook business to give it a chance to trade at a higher valuation.
The company did not say on Monday if it would take the new company public.
Barnes & Noble put itself up for sale in 2010 but attracted only one firm offer - a bid for $17 per share, or $1 billion, last May, from Liberty Media, which was drawn by the Nook's growth.
Liberty ultimately decided to invest $204 million rather than buy the company outright. It now has preferred shares it can convert into a 16.6 percent stake in Barnes & Noble at a strike price of $17. A spokeswoman for Liberty Media was not immediately available to comment.
Microsoft and Barnes & Noble will introduce an application for the Nook on Windows 8, the upcoming version of Microsoft's operating system.
Shares of Barnes & Noble soared 93 percent to $26.40 in premarket trading. The company was valued at just above $823 million at Friday's close.
Microsoft shares rose 0.2 percent to $32.04.
(Writing by Martinne Geller in New York; Additional reporting by Mihir Dalal in Bangalore; Editing by Lisa Von Ahn, Maureen Bavdek, Dave Zimmerman)