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Barnes & Noble battle heats up

Ron Burkle accuses the bookseller's largest shareholder of self-serving deals.

August 31, 2010|W.J. Hennigan

A high-stakes battle over the nation's largest bookseller escalated Monday as Los Angeles billionaire Ronald W. Burkle accused Barnes & Noble Inc.'s chairman and largest shareholder of self-dealing, approving business deals that benefit himself and his family.

The accusatory letter, sent to shareholders Monday, was the latest move in Burkle's monthlong proxy battle to secure three seats -- including one for himself -- on the company's board of directors. Burkle's investment firm, Yucaipa Cos., owns about 19% of the company and wants to buy more.

Yucaipa is seeking to amend Barnes & Noble's "poison pill" plan that now limits investors from owning more than 20% of its shares without approval by the board. Yucaipa wants to bump that number to 30% at the annual shareholder meeting Sept. 28.

The Los Angeles investment firm said it was unfair that Barnes & Noble Chairman Leonard Riggio and his family, combined, could own about 33% of the bookseller but no other entity could own more than 20%.

"Our proposal requesting the board to amend the poison pill is simply designed to send a message that all stockholders should be treated the same," the letter said. Riggio alone owns almost 30%.

The Yucaipa letter went on to say that Riggio is running Barnes & Noble like a private business. Barnes & Noble paid "almost $70 million in lease payments for office space, warehouses and bookstores owned by entities in which the Riggio family has majority or minority interest," it said.

The bookseller, in turn, has been harsh in its evaluation of Burkle.

"Mr. Burkle has provided no strategic vision and offered no plan for Barnes & Noble's future, yet he is persisting with costly litigation and a proxy contest to promote his self-serving agenda at shareholder expense," spokeswoman Mary Ellen Keating said in a statement. "His agenda is transparent -- to gain creeping control of Barnes & Noble without paying a control premium to other shareholders."

The heated exchange comes at a time when Barnes & Noble is considering selling itself. The two companies began going after each other late last year when Yucaipa started aggressively buying shares of the bookseller and criticizing its management.

Barnes & Noble, which Riggio built into a sprawling chain, sent a scathing letter to shareholders last week saying Burkle wanted to wrest control of the bookseller.

The letter also said Yucaipa was working in collaboration with the company's third-largest investor, Santa Monica money manager Aletheia Research & Management Inc.

Aletheia owns about 15% of Barnes & Noble shares. If Yucaipa and Aletheia vote together, their 34% stake is bigger than the Riggio family's. In the letter, Barnes & Noble told investors that Yucaipa was conspiring to "steal your company."

Yucaipa has repeatedly denied the allegation, and Aletheia officials did not return repeated phone messages. A Delaware judge, upholding the company's poison-pill rules, said there was reason for the bookseller to have concerns that the two investment firms might be working together.

Vice Chancellor Leo. E. Strine Jr. of Delaware's Court of Chancery said there was no outright proof the two parties collaborated, but "the board had good reason to be concerned that these two large investors were capable of and interested in cooperating in a joint effort to take effective voting control of the company."

Strine wrote that Peter Eichler, Aletheia's founder, seemed to look up to Burkle.

"At his deposition, Eichler gushed over Burkle, and made clear that for him, the chance to talk investments with Burkle was equivalent to an aspiring songwriter getting to trade licks and lyrics with Dylan," the judge wrote.

"In the same deposition, Eichler expressed his view that Barnes & Noble would be fortunate to have Burkle on its board."

Yucaipa and Aletheia have invested in several of the same companies at about the same time, including Whole Foods Market Inc. and Great Atlantic & Pacific Tea Company Inc.

Peter Wahlstrom, an equity analyst with Morningstar Inc. who is familiar with the two firms, said Yucaipa and Aletheia "seem to have an arm's-length relationship."

"They may have shown a similar investment methodology, but that doesn't mean they're aligned officially," Wahlstrom said. "They both saw an opportunity to invest in a company that they saw as undervalued."

Barnes & Noble has faced tough times amid the economic downturn and is facing heavy competition in the field of electronic books. Because of this, analysts have recommended that Barnes & Noble begin selling some of its 717 brick-and-mortar stores.

Last week, Barnes & Noble said it lost $62.5 million, or $1.12 a share, in its fiscal first quarter, which ended July 31. In the same period last year it earned $12.3 million, or 21 cents.


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