Barnes & Noble, Burkle Draw Battle Lines

The proxy fight for control of Barnes & Noble began in earnest last week when both sides sent out materials to shareholders to solicit votes. As in any battle, the two parties slammed the qualifications of their opponents, with B&N charging that Ron Burkle’s Yucaipa Companies is trying to take control of the retailer without paying a premium for the company, while Burkle asserts that under the leadership of Len Riggio, B&N’s share price has badly underperformed, especially since August 2009.

Although Burkle paints himself as the underdog in the fight, since he and his firm own just under 20% of B&N stock (and are blocked from buying more by the poison pill) while Riggio and B&N insiders own about 33% of the shares, there is a real possibility that Riggio could be voted off the board of the company he founded. That’s because Aletheia Research & Management owns roughly 15% of B&N shares and, as the retailer’s material states, Burkle and Aletheia have worked before to take control of a company, teaming up to gain a 60% stake in A&P. The B&N board’s letter sent to shareholders urges them to prevent Burkle and Aletheia from forming a bloc “to steal your company” by voting for the B&N slate of directors—Len Riggio, David Golden, and Dr. David Wilson. Opposing those nominees are Burkle, Stephen Bollenbach, and Michael McQuary.

The B&N letter argues that as B&N implements its plans to make the transition from a traditional bookstore chain to a player in the digital market, it needs leadership that understands the company and its plans. Burkle, the letter contends, “brings no relevant experience, no insight, no business plan, no strategy and no track record to Barnes & Noble.”

For his part, Burkle charges that B&N and its stock price have suffered because the current board “is rife with business and personal conflicts and historically has been a rubber stamp for the Riggio family’s interests.” Although Burkle’s materials cite a number of instances where he charges that Riggio has benefited from related-party transactions, Burkle sees the purchase of Barnes & Noble College Booksellers from Len Riggio and his wife “the most egregious.” The acquisition left B&N in debt, and as part of the financing arrangements Riggio holds a $250 million note.

Burkle’s dislike of the college bookstore deal could be one reason that B&N executives stressed how well the division did in the first quarter of fiscal 2011, noting in particular that the same-store sale increase of 2.9% was higher than forecast. The acquisition of the college division last September added $226 million to sales, helping to offset a 2.6% decline in sales through the retail trade stores. The company’s investment in upgrading its digital capabilities also paid off in the first quarter, B&N executives said, with sales of e-books and the Nook driving the 41.8% increase in revenue at B&N.com in the period. Despite the overall revenue gain, B&N had a net loss of $62.5 million in the period compared to earnings of $12.2 million in the first quarter of fiscal 2010. The loss was due in part to a $9.5 million charge resulting from Burkle’s lawsuit plus investments in digital technology.

The “significant” costs associated with the proxy fight caused B&N to lower its earnings outlook for the second quarter and full year, but in what is good news for publishers, B&N said it still expects same-store sales for its retail trade stores to range from flat to up 3% for the year, led by an expected improvement in the holiday period.

Barnes & Sales by Segment, First Quarter ($ in millions)

source: barnes & noble