Barnes & Noble war is com­ing to a head

Burkle and Rig­gio face off next week at the an­nual meet­ing. Board up­heaval is pos­si­ble.

Los Angeles Times - - Business - An­drea Chang

Af­ter months of bit­ter attacks, Los An­ge­les bil­lion­aire Ron­ald Burkle and Barnes & Noble Inc. Chair­man Leonard Rig­gio are ex­pected to face off Tues­day in the next chap­ter of a pro­longed bat­tle over the world’s largest book­seller.

On one side is Burkle, 57, who made his for­tune in su­per­mar­ket chains and has been rapidly ac­cu­mu­lat­ing Barnes & Noble stock since late last year, rais­ing the prospect that he is seek­ing con­trol of the com­pany.

On the de­fen­sive is Rig­gio, 69, who grew Barnes & Noble from a sin­gle store in 1971 to the 1,350-out­let be­he­moth it is to­day, one that crit­ics have blamed for the demise of small, in­de­pen­dent book­stores.

The fight has grown in­creas­ingly nasty in re­cent days with the two out­sized per­son­al­i­ties not only slam­ming the other’s busi­ness savvy, fi­nan­cial prow­ess and mo­tives but also re­sort­ing to more per­sonal barbs. They will con­front each other Tues­day in New York at Barnes & Noble’s an­nual meet­ing, which could re­sult


in a ma­jor shakeup of its board of di­rec­tors.

Burkle has ac­cused Rig­gio of bla­tant self-deal­ing and crit­i­cized the com­pany’s lack of di­rec­tion; Rig­gio says Burkle is out to take over the com­pany with­out pay­ing share­hold­ers a pre­mium.

An­gered by Barnes & Noble’s re­fusal to al­low him to in­crease his roughly 19% stake, Burkle es­ca­lated the fight in Au­gust by launch­ing a proxy con­test over three seats on the com­pany’s nine­mem­ber board. Burkle has pro­posed a dis­si­dent slate, in­clud­ing him­self, in a move to un­seat Rig­gio and de­feat two other can­di­dates nom­i­nated by the com­pany.

He is also seek­ing to amend the com­pany’s “poi­son pill” pro­vi­sion, which is in­tended to pre­vent hos­tile takeovers by bar­ring in­vestors from hoard­ing more than 20% of its shares with­out ap­proval by the board.

A Burkle vic­tory might not mean the end for Rig­gio, who would still be the com­pany’s largest share­holder and could be reap­pointed as a di­rec­tor if the board ex­panded to 10 seats.

The fi­nal days lead­ing up to next week’s meet­ing, when the vot­ing ends, have been marked by a flurry of ac­tiv­ity from both sides to se­cure share­holder votes.

Rig­gio and Burkle have been fly­ing around the coun­try to make their case in per­son to large share­hold­ers and have hired proxy so­lic­i­ta­tion firms to call smaller ones and field ques­tions by phone. They’ve also sent “fight letters” blast­ing the other’s past busi­ness de­ci­sions and com­pe­tence.

In a let­ter to share­hold­ers last week, Burkle’s Los An­ge­les-based in­vest­ment firm, Yu­caipa Cos., said Barnes & Noble’s as­ser­tion that Burkle was try­ing to take con­trol of the com­pany “shows you just how fic­tional their hys­ter­i­cal claims are.”

Rig­gio fired back in a let­ter Tues­day in which he ques­tioned Burkle’s fi­nan­cial ex­per­tise and said many com­pa­nies Burkle has in­vested in “have later en­coun­tered se­vere fi­nan­cial dis­tress, in­clud­ing bank­ruptcy.”

Burkle sought to reach out to Barnes & Noble em­ploy­ees this week, writ­ing a let­ter he hoped the com­pany would dis­trib­ute on his be­half.

“Leonard Rig­gio doesn’t want any­one else in his story,” he wrote in the Thurs­day let­ter, in which he talked about his roots as a gro­cery bag­ger and his suc­cess with su­per­mar­ket chains in­clud­ing Food 4 Less and Ralphs. “He be­lieves this is his com­pany … ex­cept he doesn’t own it … not even half of it … but he acts like he does.”

The let­ter was fol­lowed by a Barnes & Noble state­ment Fri­day say­ing it had “no in­ten­tion of send­ing Burkle’s in­sult­ing and mis­lead­ing let­ter to our peo­ple.”

The an­nual meet­ing, usu­ally an un­event­ful one-hour af­fair, will draw in­vestors, an­a­lysts and me­dia to the au­di­to­rium of the Asia So­ci­ety in New York. As chair­man of the board, Rig­gio will pre­side. Burkle plans to at­tend and has re­quested the op­por­tu­nity to ad­dress the au­di­ence, one of his rep­re­sen­ta­tives said.

Share­hold­ers have been cast­ing their votes by mail, phone and on­line since Au­gust. They can also vote at the meet­ing.

Proxy con­test ex­perts said the Barnes & Noble fight is un­usual be­cause only about one-quar­ter of the shares are up in the air af­ter ac­count­ing for stock held by Rig­gio, com­pany in­sid­ers, Burkle and Aletheia Re­search & Man­age­ment, a Santa Mon­ica in­vest­ment firm that has a his­tory of sid­ing with Burkle.

In­sid­ers who have seen daily re­ports tab­u­lat­ing the vot­ing say it’s a neck-and­neck race and that the re­sults may be too close to an­nounce at the meet­ing. If so, it could take a cou­ple of weeks for an in­de­pen­dent elec­tion in­spec­tor to cer­tify the votes, ac­cord­ing to a source fa­mil­iar with the process who could not speak pub­licly be­cause the vot­ing re­ports are con­fi­den­tial.

Al­though 3 out of 4 proxy ad­vi­sory com­pa­nies have backed Rig­gio’s slate, Burkle ap­pears to have drummed up sig­nif­i­cant share­holder sup­port.

“Nor­mally we don’t com­ment on our com­pa­nies, but in this case I can tell you we are vot­ing with the dis­si­dents,” said Delia Pais, a re­search as­sis­tant with Do­heny As­set Man­age­ment in Los An­ge­les. She de­clined to elab­o­rate.

What­ever the out­come, Barnes & Noble faces sig­nif­i­cant chal­lenges be­cause of the fast-chang­ing na­ture of the book­selling busi­ness. Af­ter reach­ing a record high of $47.40 in early 2006, its stock has been mostly in de­cline, fall­ing 11% this year and clos­ing at $17 on Fri­day.

The New York com­pany has be­gun seek­ing po­ten­tial buy­ers, with Rig­gio in­di­cat­ing he’s in­ter­ested. Ear­lier this year, the com­pany ousted Rig­gio’s younger brother Steve as chief ex­ec­u­tive, re­plac­ing him with the head of its on­line di­vi­sion.

If Burkle wins the share­holder vote, it would give him sig­nif­i­cant in­put in the com­pany’s man­age­ment and di­rec­tion, an­a­lysts said. But while he has been vo­cal in his crit­i­cism, he has yet to lay out a strate­gic plan for Barnes & Noble, which has drawn the ire of the book­seller and puz­zled in­dus­try watch­ers.

“We don’t know ex­actly what Burkle wants,” said David Schick, an an­a­lyst at Stifel, Ni­co­laus & Co. “What we do know is what Burkle has a prob­lem with.”

In Thurs­day’s let­ter to Barnes & Noble em­ploy­ees, Burkle re­it­er­ated that he was not out to take over the com­pany. “Three new di­rec­tors can’t con­trol any­thing — but they can make sug­ges­tions, ask ques­tions and ex­plore new ideas,” he said.

An­a­lysts have spec­u­lated that Burkle might take an ag­gres­sive ap­proach in re­shap­ing the com­pany, which could in­clude clos­ing un­der­per­form­ing stores and in­vest­ing more in its dig­i­tal and on­line di­vi­sions. He has also been sharply crit­i­cal of the com­pany’s de­ci­sion to pur­chase a col­lege book­store busi­ness from Rig­gio for $514 mil­lion.

Al­though Barnes & Noble is a mas­sive brick-and­mor­tar book­store chain, an­a­lysts said it is a gi­ant in a mar­ket that is shrink­ing as more con­sumers turn to other av­enues for books, in­clud­ing the In­ter­net and dis­coun­ters. It’s also be­ing squeezed by dig­i­tal e-read­ers such as Ama­’s Kin­dle and Ap­ple’s iPad.

“I don’t know that the com­pany is in dire straits and needs an out­side in­jec­tion, but of­ten in volatile mar­kets or in­dus­tries, change can be a good thing,” said Peter Wahlstrom, an eq­uity an­a­lyst with Morn­ingstar Inc.

“But you’d much rather have all par­ties be on the same page if you’re sug­gest­ing or mak­ing a change. And what you have here in the near term is prob­a­bly more of a dis­trac­tion than any­thing.”

Alex Bran­don

AT ODDS: The spar­ring be­tween Yu­caipa Cos.’ Ron­ald Burkle, left, and Barnes & Noble’s Leonard Rig­gio has grown in­creas­ingly nasty.

An­drew McPher­son

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