With less than two weeks to go in the increasingly bitter and protracted proxy contest between Barnes & Noble (BKS) founder, chairman and top shareholder Leonard Riggio and billionaire Ron Burkle, one key analyst has changed his outlook on the company's stock for the worse and a leading proxy advisory firm has sided with the Riggio camp.

On Wednesday, Bank of America's (BAC) Merrill Lynch analyst downgraded his outlook on B&N shares from neutral to underperform, citing "uncertainty surrounding the company's digital initiatives and a deteriorating balance sheet." The bank also dropped its price target to $13 a share from $15 a share. While Barnes & Noble's stock price plunged as low as $11.89 a share in July compared to its 52-week high of $25.07, it's currently trading above its 50-day moving average of $14.24.

The stock downgrade comes as the Riggio/Burkle battle, which has dominated headlines and interest for much of the year, builds to what will likely be a tumultuous crescendo at the company's annual shareholders meeting on Sept. 28 in midtown Manhattan. Over the past few weeks, each side has sent out a series of letters heavy on emotion and repetitive on the talking points in an attempt to win the votes of shareholders. On Monday, Burkle, through his company, Yucaipa Cos., cried "ENOUGH WITH THE FICTION," telling shareholders that B&N's board was trying to "scare you with misleading statements about Yucaipa to distract you from the real issues."

Burkle has long been upset that the company used a "poison pill" measure to prevent him from acquiring more than 20% of its stock when Riggio holds nearly 30%. The Delaware Chancery Court sided with Barnes & Noble, but Burkle is appealing the ruling. B&N, in turn, has seen its overall sales decline throughout the year and is exploring the possibility of a sale.

Real Lobbying Targets the Advisory Firms

But in a filing with the SEC last week that spelled out its upcoming presentation to investors, the B&N board stressed that its review of strategic alternatives -- in other words, a possible sale -- is a process designed "to deliver full value to all shareholders." They further explained that the company's acquisition last year of BN College stores from Riggio, a move that was criticized by Burkle and is the subject of various shareholder lawsuits, was necessary in order "to undertake the digital transformation" that has led to its Nook e-reader and a growing emphasis on digital initiatives and sales. The board implores shareholders "not to be fooled" by Burkle, whom they view as trying to gain "creeping control" of the company without any real strategy.

No doubt there will be more missives and metaphorical grenades lobbed by each side in a desperate attempt to cajole shareholders to vote with either the white card (for B&N) or for the gold card (for Burkle.) But, as the The Wall Street Journal points out, with the Riggio and Burkle camps each accounting for about one-third of total shares, the Sept. 28 vote will hinge on the decisions of a group of institutional shareholders and index funds that will be looking to recommendations from key proxy advisory companies like Glass Lewis, Proxy Governance and Institutional Investor Services.

Glass Lewis issued their recommendation
Tuesday evening that shareholders should vote for B&N's nominated board of directors, and also recommended that they vote to keep the "poison pill" in place. While the proxy advisory firm admits that Burkle "has identified certain areas of concern," Glass Lewis said there is little reason to believe that electing his slate of nominees to the board will "result in a superior outcome for B&N or its shareholders." The recommendation goes against the usual grain for Glass Lewis, since it feels in general that poison pills "can reduce management accountability by substantially limiting opportunities for corporate takeovers." But the firm felt that Burkle didn't make a strong enough case for shareholders to vote with his slate of directors.

The Barnes & Noble board should view the Glass Lewis recommendation as a muted victory, one that will likely result in a win in two weeks if ISS and Proxy Governance follow suit. It also demonstrates that the real impetus for these strongly worded letters was to indirectly lobby those influential firms toward the "correct" outcome. But when a fight is so bitter and seemingly non-resolvable, even the advisers' recommendations are likely only to extend the acrimony and make the upcoming shareholders meeting that much more polarized -- and, perhaps, more entertaining.

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