August 20, 2010 / 8:46 PM / 9 years ago

Barnes & Noble proxy war and earnings complicate sale

NEW YORK (Reuters) - The war that has erupted between Barnes & Noble Inc’s (BKS.N) two largest shareholders over control of the bookseller is putting a wrench in its plans to sell itself and could make the retailer less appealing.

A view of the Barnes and Noble bookstore on the corner of Warren and Greenwich street in New York June 29, 2010. REUTERS/Lily Bowers

The company is expected to report a quarterly loss on Tuesday, and the extent of the damage is likely to affect who shareholders vote for at next month’s annual meeting.

The conflict pits company founder and Chairman Leonard Riggio against billionaire Ron Burkle, who is waging a proxy battle to place three of his directors on the board. Burkle has accused Riggio of managing Barnes & Noble for his own benefit.

Few bidders for what is already regarded as a tough sell are likely to step up until the dust settles.

“Nothing is going to happen for a while. It is a long road we’re on,” a source familiar with the sales process told Reuters. The source suggested that the process may also lean more toward a financial restructuring, though all options are being explored.

Last week, Burkle fired his opening salvo after losing a court challenge to terminate the company’s poison pill. He nominated three directors, including himself, for the board.

Riggio, who built up the bookseller into the No. 1 national U.S. chain, is up for reelection and is backing two outside directors to add clout to the board. He is also seeking investors to join him in a bid for the company.

Barnes & Noble put itself up for sale earlier this month after suffering for years as retail giants like Wal-Mart Stores Inc (WMT.N) siphoned off physical book sales. It is also fending off growing competition from electronic books sold by Amazon.com (AMZN.O) and more recently Apple Inc (AAPL.O).

Burkle has said Barnes & Noble’s board is packed with Riggio cronies and his Yucaipa Companies firm said in a regulatory filing on Thursday that changing the board would go a long way to making the bookseller attractive to buyers.

Burkle also questioned whether Riggio was sincere at all in launching the sales process, saying it might be a ploy to allow him to acquire the company while the stock price is low. Barnes & Noble’s shares are down about 40 percent in the past year.

Others have said the sale process could just be a trial balloon to see what price Barnes & Noble could fetch.

“A sale isn’t the only option,” the source familiar with the sale process said. “It’s a full process. Restructuring and any number of options are on the table.”

Burkle, who built his fortune through buyouts of West Coast supermarket chains, has sought investments in troubled but prominent companies, such as movie studio Miramax and the New York Times Co (NYT.N). In June, he took a 6 percent stake in clothing maker and retailer American Apparel Inc APP.A.

TELLING NUMBERS

Barnes & Noble warned investors in June it expected to lose 85 cents to $1.15 per share in the first quarter and Chief Executive William Lynch said expenses to develop its digital business and Nook e-reader would hit its results.

“The vast majority of the loss will be from the Nook expenses,” said Morningstar analyst Peter Wahlstrom.

Wahlstrom said investors would be looking for signs that Barnes & Noble’s e-books strategy is gaining traction. That would be hard to assess since the retailer, like Amazon, does not break out exact Nook or e-books sales figures.

“The market is getting full of devices — they either have to commit to the development costs or partner with somebody,” said Forrester analyst James McQuivey.

By McQuivey’s estimates, Amazon has sold about 5 million Kindles so far, while Barnes & Noble has sold 1 million Nooks since the device’s launch last autumn. Each device generates sales of two e-books per month on average, he said.

But the extent of the first-quarter loss could determine whether Burkle prevails or whether Riggio does.

“The worse that the performance is, the better it is for Burkle. The more performance deteriorates, the more you’re probably willing to make some changes,” said University of Chicago finance professor Steven Kaplan.

On the other hand, if the results show progress, shareholders could prefer to stick with Riggio’s approach.

Burkle, who has amassed a 19.2 percent stake, is likely to get some help from Barnes & Noble’s third largest investor, money manager Aletheia Research and Management Inc.

In a court document filed last week in which he upheld the anti-takeover poison pill, Delaware Chancery Court Vice Chancellor Leo Strine said Aletheia founder Peter Eichler would likely vote in tandem with Burkle.

“At his deposition, Eichler gushed over Burkle, and made clear that for him, the chance to talk investments with Burkle was equivalent to an aspiring songwriter getting to trade licks and lyrics with Dylan,” the judge wrote.

Eichler, whose firm owns 15.4 percent of Barnes & Noble shares, did not respond to an e-mail request for comment.

If Yucaipa and Aletheia vote together, their combined 34.6 percent stake in Barnes & Noble could counter Riggio. If he loses, Burkle could go hostile, though Yucaipa said in a filing on Thursday that it had never taken that route.

“You might see a takeover bid and if it’s a high enough offer, you might see Riggio sell,” Kaplan said.

Reporting by Phil Wahba; additional reporting by Jessica Hall in Philadelphia; Editing by Michele Gershberg and Richard Chang

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