10 February 2010

Someone out to takeover B&N?

Despite financial issues at Borders Group, the number one book retailer, Barnes and Noble, has taken measures to prevent a potential hostile takeover of the company. It started in early 2009 when Ron Burkle, through his investment firm, Yucaipa Companies, began acquiring stock in the company. In January of 2009, they paid $67 million to acquire an 8.3% stake in B&N. Burkle, who’s other holdings is a 42% stake in Source Interlink, which distributes books, magazines and other media products to a wide variety of outlets, including bookstores and newstands believes B&N’s stock is “currently undervalued.” By November, they had upped its stake 16.8% and now have approximately 19% of the outstanding Barnes & Noble common stock which was bought in open market purchases.

In November, B&N -fearing a hostile takeover bid - adopted a shareholder rights plan that will make it extremely difficult for any outsider to get control of the retailer. Also known as a “poison pill,” the rights plan would kick in if “a person or group,” without board approval, acquires 20% or more of B&N's stock. The plan will also go into effect if a person or group already owning 20% or more of B&N stock acquires additional shares without board approval. A poison pill is defined in Wikipedia as when a bidder tries to “obtain control of a company, either by soliciting proxies to get elected to the board or by acquiring a controlling block of shares and using the associated votes to get elected to the board. Once in control of the board, the bidder can determine the target's management.”

Also, according to Wikipedia this “shareholder rights” they adopted will now gives B&N to issue “rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock. The new rights typically allow holders (other than a bidder) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 15%). This dilutes the percentage of the target owned by the bidder, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it provides shareholders (other than the bidder) with rights to buy more stock in the event of a control acquisition.”

Essentially, the goal of this shareholder rights plan is to force Burkle to negotiate with the target's board and not directly with the shareholders.

This has not set well Burkle, who in late January sent a letter to the Barnes & Noble board of directors. In his comments, Burkle was “surprised” at the poison pill initiative because he had spoken to Len Riggio, the chairman and CEO of B&N, prior to his company purchasing the stock and made sure “he understood our views and concerns as an investor.”

“The fact that the Riggio family,” Burkle wrote, “and other Company insiders own over 37% of the outstanding stock, and that over the past 3 years Len was allowed to increase his personal stake by approximately 10% of the outstanding stock (to over 30% of the outstanding shares), in my view shows that the Board and its Chairman endorse two sets of rules: one for the Riggio family, and one for the rest of the Company’s shareholders. I believe the poison pill allows Len and other Company insiders to exert effective control over the shareholder franchise, while at the same time Len has taken a great deal of money off the table by selling his textbook business to the Company, thereby reducing the Company’s liquidity and burdening the Company and its shareholders with significant debt to finance that purchase.”

Burkle believes these new rules has a “coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest.”

Burkle pointed out in his letter that he was concerned about how the poison pill is applied to Riggo and his family. “Are shares held by Stephen Riggio or Leonard Riggio’s other family members considered ‘excluded shares’ under the poison pill? If that is not the case, then Stephen and Leonard Riggio could collectively own approximately 50% of the outstanding stock without triggering the poison pill. Yet, neither we nor any other shareholder can own more than 20% of the Company’s shares. Please explain the Board’s intended interpretation of the poison pill and any justification for allowing the Riggio family to acquire without triggering the pill up to 50% of the Company’s shares, but to cap all other shareholders at 20%.”

Without any changes or waiver’s, Burkle argues to the Board, that if the Riggio family is allowed to acquire more stock, it would “create a near insurmountable barrier to us (or any other non-Riggio shareholder) in waging a successful proxy contest.”

And things got a bit more interesting, when it was revealed today that Aletheia Research & Management now owns more than 10 million shares of the retailer, giving it a 17.5% stake in B&N. Aletheia acquired nearly 2 million shares of B&N in the January 21 to January 29 period, paying more than $41 million for the shares. In all, the firm has paid more than $210 million for its B&N stake.

Why Burkle feels the B&N stock is “undervalued” is not clear, as his real intention of acquiring so much of its shares. Is he attempting a hostile takeover, or is just trying to pump up the stock?

I guess to be continued would be the answer here.

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