The Story of B&N: Struggle to Survive

In what appears to be an effort to strengthen his voting position for a likely proxy fight, B&N founder and Chairman Leonard Riggio has excercised options to buy 990,740 shares of B&N stock for $16.8 Million, or $16.96 a share.  Based on the Tuesday closing price of B&N stock, Riggio paid about $1.61 premium per share over the tuesday closing stock price. B&N has put itself up for sale and Riggio is preparing for a likely proxy battle against financier Ron Burkle, who has been pressuring B&N to improve its stock price.  B&N’s annual meeting will take place in September.

–Publishers Weekly

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.

Barnes & Noble stock, which was flying high above $45 five years ago, has plummeted below $15. W all Street’s view of its prospects is so dim that not even the news of a bid battle has set it alight. The only bright spot: The company’s e-book sales, which rocketed 51% last quarter.

Three years ago, an e-book reader cost $400, offered a limited choice of books, and had a dark gray screen that wasn’t so easy on the eyes. Today they’re just over $100, offer almost unlimited choices of books, and the screens are excellent. And, naturally, you can download books over the air.

When these things happen, they happen quickly.

When I was growing up, record stores were a place you could hang out. In a really great store — one of those big city leviathans spread over several stories — you could spend the best part of a day flipping through the racks looking for hard-to-find records, obscure titles, things you’d never even heard of.

Teenagers today probably have no idea what I’m talking about. Who goes to a record store? Why don’t you just download your music onto your iPod?

As recently as 2001 there were music stores everywhere. As many as 80,000 people worked in them, according to the Labor Department. And that was a number that had been steady for years.

In 2002 the iPod took off. Today the number working in music stores is 20,000 — a 75% collapse.

As for the book industry: About 125,000 people still work in book stores and news dealers, according to Labor. How many of them will still have jobs in two years? Another 75,000 work in book publishing. When writers self-publish in electronic format, how many publishers will still be left?

–Brett Arends, MarketWatch.com

(Leonard) Riggio, who leads the board of directors, is clearly dedicated to the bookselling business. While a college student at NYU, he worked in a Manhattan bookstore. Riggio soon opened his own bookstore, focused on college students, and then expanded and acquired until he’d built the nation’s largest bookstore chain. He’s acquired smaller chains, created megastores, added cafes, destabilized independent booksellers, survived the advent of Amazon.com and outclassed Borders, a once-worthy rival.

Today Leonard Riggio, Barnes & Noble’s founder and chairman, exercised an option to buy almost a million more shares of the company. He’ll be spending $16.8 million on 990,740 shares, which brings his total to… well, a lot. Before the purchase, Riggio held about 29.9% of the company’s shares……

the company is in trouble, but it has made it attractive to someone — namely, investor Ron Burkle. He’s already a large stockholder, possessing 19.2% of shares. The company doesn’t want another investor to take over — in 2009, it implemented a poison pill that’ll be triggered if someone else’s shares reach 20%. Yes, Burkle is close. He tried to remove the poison pill by legal action  this year, but a judge ruled against him Aug. 11. The Wall Street Journal reported:

Vice Chancellor Leo Strine of the Delaware court said Barnes & Noble was “reasonable” in its decision to use the poison pill to ensure that Mr. Burkle couldn’t acquire control of the company while bypassing the board.

That action launched a proxy fight. There’s Burkle on one side, lining up his allies, and Riggio, lining up his in opposition, all hoping to tug the smaller remaining investors over to their sides. Riggio’s side has a small advantage, numbers-wise. Burkle’s investment company has nominated a slate for the board of directors that includes himself; Riggio is up for reelection.

If Riggio maintains control, chances are Barnes & Noble will continue on its path, which is open to adaptation but relatively predictable (it’s a bookstore). If Burkle gets control, well, then things could certainly get interesting.

– Carolyn Kellogg, LATimes

My hunch is that B&N never really embraced the Internet or e-books, tied as it was to the old-fashioned world of physical books and stores. As B&N focused on managing decline, a much more nimble Amazon could concentrate exclusively on the new world it was forming. B&N needed to destroy its business model to prevail. Now it is probably too late. There is a lesson for all businesses here.

As for B&N, I give them credit for democratizing books, boosting sales and getting people to read. As an author, I feel I’ve benefited from their aggressive marketing and in-store promotions. But I feel that world already has disappeared. Maybe dissident B&N shareholder Ron Burkle has some bold ideas for reinventing book retailing. If so, more power to him. But as an investor, I’m staying clear of B&N shares. (I do own Amazon, as I’ve reported.)

B&N shares sank below $12 a share in July, less than half their high for the year. They jumped more than $3 after news of the sale, suggesting some investors think a bidding war might break out. The company says it is selling because shares are cheap. But in my experience, most companies sell when they believe their shares are expensive.

- James B. Stewart, Wall Street Journal

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.

Spy Hunter

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