Monday, February 1, 2010

BKS: Let the Fireworks Begin

Lonely Value has been long and wrong on Barnes & Noble (BKS), but that may be about to change.

This afternoon billionaire Ron Burkle sent a letter to the BKS board of directors and, by extension, to the Riggio family, controlling shareholders of the company. In the letter, Burkle's company (Yucaipa) expresses a desire to increase its current 18.7% stake to 37%, effectively matching the Riggio ownership level. This would trigger a 20% poison pill. So Burkle is asking the board to allow such a move without the trigger.

The Yucaipa letter reads (in part):
My name is Ron Burkle and through my Yucaipa investment funds I am a significant shareholder in Barnes & Noble. We believe Barnes & Noble is currently undervalued, and have therefore bought approximately 19% of the outstanding Barnes & Noble common stock in open market purchases. I was surprised to find that, even though I spoke with Leonard Riggio prior to our purchasing any shares to make sure he understood our views and concerns as an investor, the Company has reacted to our stock purchases by implementing a poison pill prohibiting us (or any other non-Riggio shareholder) from acquiring stock ownership above a 20% threshold.

The fact that the Riggio family 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.

We believe having over 37% of the Company shares in the hands of the Riggio family and other insiders, coupled with the 20% ownership limitation enforced on other shareholders under the poison pill, has a coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest. This has the effect of placing de facto control of the Company in the Riggio’s hands, despite their owning much less than a majority of the Company’s shares.

We believe the poison pill is counterproductive, unnecessary, and inappropriately impairs the free and fair exercise of the shareholder franchise. Put simply, we believe it hurts the share price and inappropriately penalizes Barnes & Noble’s “non-Riggio” shareholders. We also firmly believe that by implementing the poison pill but nonetheless allowing Len Riggio and other insiders to own over 37% of the stock, the Board is sending a message to the other shareholders and the investing community that Barnes & Noble is a company controlled and operated for the benefit of selected insiders.

In short, if the Riggio's can own 37%, then why not Yucaipa? The poison pill is a sham, protecting only shareholders named Riggio. Kudos to Burkle on impeccable logic.

Lonely Value recommended BKS shares back in November and also mentioned the growing ownership of Yucaipa. Until today, this rising ownership stake hadn't garnered much outside attention. Nevertheless, it could be a major positive catalyst for outside shareholders.

Not surprisingly, the Riggio family takes a "contrary" view.

On November 17, 2009, the Company's board conveniently announced a poison pill, euphemistically referred to as a "shareholder rights plan", and (as with all such moves) said it was:
"intended to protect the Company and its stockholders from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders."
Really? Aren't all poison pills designed to protect incumbent managers? Left unsaid in the press release - the Riggio family's past actions are "inconsistent" with those very same stockholder interests. Given the company's performance, management's defensiveness is understandable. They may even have a genuine inferiority complex.

Too bad they think outside BKS shareholders are stupid enough to swallow this "we're protecting you" line of reasoning.

Many will say that Barnes & Noble is a dying company, a dinosaur. Recent news out of the company has given cold comfort to those who believe differently. As this article is being written, CNBC is loudly regurgitating all the reasons to hate BKS shares. It's a tired old song abut a changing landscape, etc.

Translation: Amazon, Amazon, Amazon.

Hello! That is exactly WHY Barnes & Noble is so cheap (and attractive). Whatever happened to "buy low" or "buy when others are fearful"?

Ron Burkle didn't get where he is by listening to the crowd. Barnes & Noble is an under-managed (profitable) company in a fragmented industry. There is room for a physical alternative to Amazon.com (AMZN). Brick and mortar isn't dead. And BKS may be unique among its peers. It has the financial strength to survive. The possible demise of Borders Group (BGP) only makes the competitive landscape all the more intriguing.

Enter Yucaipa: They should throw the full corporate governance book at Barnes & Noble and its entrenched interests. Outside shareholders have little to fear from Burkle and Co. Current management has shown that they don't have our best interests at heart. Past actions speak volumes. The company's leadership under the Riggio's is hardly one to write home about.

This may be the start of beautiful new chapter for Barnes & Noble. I can't wait to read it.


Disclosure: Author owns BKS shares.

3 comments:

  1. hey I found your blog about a month ago, and I have read some of your posts which seemed to have well thoughtout ideas. I was wondering how you would FPL in the current enviroment. Do you think it makes a reasonble vaule investment when you consider they own many nuclear plants and other energy producing equipment that would a very high replacment cost in today or tommarows enviroment and so I think it's slightly undervalued right now but it could jump in value if we were to have an energy crisis in the next few years. Anyway I wanted to see if you could share your thoughts on FPL. thanks

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  2. Sorry Anonymous for the delayed response. Unfortunately FPL isn't a company I follow closely. Never thought utilities were an area of expertise for me. Thanks for reading. Wish I was more helpful on this one.

    One caution: In a rising interest rate environment, utilities may come under selling pressure as investors find safer yields elsewhere.

    And I think the "energy crisis" thesis is overplayed by many investors.

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  3. I just bought bks today at ~$13. I think there is a good chance that the poison pill will get thrown out. How can a judge allow a poison pill provision to stand when simply voting against it (if 20% of shareholders) triggers the pill?

    Second, when Michael Del Giudice was pressed to define what problem the poison pill would solve, he couldn't articulate it.

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