What a difference a day makes. Late Wednesday, it appeared that Barnes & Noble (BKS) and its second-largest shareholder, billionaire Ron Burkle, had set aside longstanding differences and were about to announce a settlement that would have them working with each other, not against each other, to figure out how the company could sell itself.
But a topsy-turvy Thursday cemented legal matters firmly in B&N's corner, quashed the possibility of compromise, and caused Burkle to set up his long-planned proxy contest. That sets the stage for a much-anticipated and likely very ugly battle between the two camps that harkens back to a very old, and very personal grudge between Burkle and founder and chairman Leonard Riggio.
Court Says Yes to the 'Poison Pill'
The largest brick-and-mortar bookselling chain first issued a statement Thursday morning saying "Barnes & Noble and Yucaipa were unable to conclude an agreement on mutually acceptable terms." Just a couple of hours later, Vice Chancellor Leo Strine of Delaware Chancery Court ruled that Burkle's lawsuit against the B&N board, charging that the "poison pill" measure enacted to prevent Burkle's stock grab from climbing above 20% of total company shares, lacked merit. Specifically, Strine concluded that B&N's "rights plan was a proportional response to the threat the company faced and was reasonably designed" to prevent "a creeping acquisition without the benefit of receiving a control premium."
Strine also refuted Burkle's "aw shucks, purely friendly" claim that the "poison pill" would make it difficult for him to wage a proxy fight against the B&N board, saying "there is good reason to believe that Yucaipa will succeed in a proxy contest," particularly if Yucaipa has the support of third largest shareholder Aletheia Research and Management, "an admiring and devoted fellow traveler" with ties to Burkle through their joint holdings of supermarket A&P (GAP) stock.
With comments like Aletheia CEO Peter Eichler comparing an investment chat with to "an aspiring songwriter getting to trade licks with Bob Dylan" and Burkle commenting that in the event of a proxy fight, Aletheia "will give [him] a good listen", Strine believed 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."
Here Comes the Proxy Fight
With the court siding in B&N's favor, that clears the way for Burkle to wage a proxy fight against the board, and target three board members seeking re-election bids - Laurence Zilavy, Michael Del Guidice, and Leonard Riggio -- with demands they be removed and replaced by individuals more receptive to Yucaipa. Those individuals are Burkle himself, Stephen Bollenbach, former CEO of Hilton Hotels and current chairman of KB Home (KBH) - whom Burkle knew from serving 15 years on the company's board of directors - and Michael McQuary, chairman and CEO of Wheego Electric Cars, and, along with Burkle, a former board member of Liquid Audio when the software company was briefly in Burkle's takeover orbit.
Now that Burkle has filed his proxy contest papers with the SEC, that effectively splits the B&N board in two: one side would consist of the approximately 38% of B&N shares held by Riggio, his brother (and former CEO) Stephen, and other family members, while the other, nearly equal share held by the combo of Burkle (at 19.2%) and Aletheia Research & Management (at about 16%.)
By that reckoning, as industry newsletter Publishers Lunch points out, "shareholders controlling 8 percent of the stock could tip the balance", which means both camps will likely court these minority stakeholders very heavily to either stick with the status quo or to jump ship and join with Burkle & friends. It also means these minority holders wield a great deal of power, especially in the expected event that B&N takes itself private, because not only can they oppose such a measure, but launch litigation against the company to stop a private bid from going forward.
The Roots of Burkle and Riggio's Emnity
With so much in flux for Barnes & Noble, one unanswered question that lingered as the acrimony between the company and Burkle grew over the last nine months was the original nature of Burkle and Riggio's relationship. Now, thanks to Strine's ruling, DailyFinance can shed a litlte more light on the two billionaires' first joint venture, and how things went spectacularly wrong.
It was around 1999, and Burkle, through Yucaipa, had just bought Alliance Entertainment Corporation, an emerging developer of both e-commerce-enabling databases and websites such as the All-Music Guide and All-Gaming Guide. One of Alliance's largest customers at the time for its distribution services was B&N, which paid in the range of $400 million on an annual basis. After a meeting in New York with Burkle, Riggio decided to invest in Alliance personally. That investment, as the court ruling indicated, "did not go well." Burkle claimed Alliance "underperformed due to the technology bubble bursting" during the dotcom bust, but Riggio testified that the problems "resulted from Burkle's poor treatment of his other partners."
Naturally, Riggio was less than pleased when he learned - evidently from Burkle's phone call - that Yucaipa was buying up B&N stock at an astonishing clip. After another phone conversation Riggio requested Burkle meet with him, and the two men did so in March 2009 at the Bowery Hotel in Manhattan. The first item of discussion: Riggio wanted out of his stake in Alliance, which Burkle had by then merged with magazine distributor Source Interlink. Riggio had lost millions of dollars of the deal, and wanted to sell his shares to Burkle at a discount. Burkle said no, though he would admit during the Delaware court trial that he knew the Alliance investment was "a dud".
That's because by March 2009, Source Interlink was on the verge of declaring Chapter 11 bankruptcy, having incurred almost $1 billion in debt from the collapsing business of magazine and mass-market paperback distribution. Burkle had filed suit the month before against several publishers and rival wholesalers on the grounds they were trying to drive Source Interlink out of business. Those entities had balked at Source - as well as another distributor, Anderson, which would eventually declare Chapter 7 bankruptcy - for imposing a 7-cent surcharge per magazine, and as a result they refused to ship copies to both distributors, which then couldn't make stock available to stores like Barnes & Noble. Source Interlink filed for Chapter 11 on April 28, 2009 and promptly went private, while Burkle extracated himself as the company's primary shareholder.
Riggio: "Didn't Think Highly of Burkle as a Partner"
Needless to say, Riggio was "completely unhappy " with his partnership with Burkle at Alliance, and testified in court that "[he] had tried for all of ten years to extricate myself from the partnership, and...did not particularly think highly of him as a - [he] didn't think highly of his judgment and didn't think highly of him as a partner." Along comes Burkle, having scooped up a substantial amount of B&N stock, and though some of Burkle's ideas for forward progress, such as partnering with a technology company like Hewlett-Packard (HPQ) or acquiring a partial or substantial stake in Borders (BGP), may have had some logic, Riggio wasn't in a mood to accept any suggestions from Burkle. And when B&N acquired the Riggio-owned B&N College chain of bookstores in August 2009, Burkle took it to be a sign of bad faith and a virtual declaration of war.
With so many twists and turns, there's no telling how dramatic events will be at B&N's shareholders meeting on September 28. But what's certain is that there will be drama, and that the fate of the largest bookseller in America is at the behest of two billionaires with very different personal and professional philosophies.
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