A war is beginning to take place over Barnes & Noble, Inc. (NYSE: BKS).  Ron Burkle, a well-known activist investor who heads various activist investor funds under the name Yucaipa, is trying to go after the Riggio family for control of the troubled Barnes & Noble book store chain.  An SEC filing from Yucaipa shows that the beneficial ownership of Barnes & Nobel common stock held by Barnes & Noble is now 10,741,213 shares of common stock.  This comes to labout 18.7% of the common stock.  And Burkle wants more stock and more from the company….

The Yucaipa filing shows that a letter was sent on January 28, 2010 by Mr. Burkle to the board of directors of Barnes & Noble that would allow Yucaipa and related entities to acquire up to 37% of the outstanding common stock without triggering the poison pill provision and to confirm that the members of the Riggio family cannot individually or collectively acquire any more common stock without triggering the poison pill provision.

In the Board Letter, Mr. Burkle also reiterated concerns regarding the adequacy and enforcement of corporate governance policies and practices after recent adoption of a poison pill.

Some of the quotes from Burkle’s letter are as follows:

“…. 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….”

What is significant about that 37% stake is that it would give Yucaipa the largest nominal stake in the company, and would be an attempt to keep the founding family members from having full control of the company.  Barnes & Noble closed up almost 3% at $18.00 today and the 52-week trading range is $15.28 to $28.78.  Shares are up over 15% at $21.30 in the after-hours session.

JON C. OGG

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