One Big Reason Why Barnes & Noble Is For Sale: Ron Burkle

To the surprise of the publishing industry and to the delight of worried investors, Barnes & Noble (BKS), the largest bricks-and-mortar bookstore in the country, has put itself up for sale.

The company phrased it a little more evasively in a release announced late Tuesday, saying it "intends to evaluate strategic alternatives, including a possible sale of the company, in order to increase stockholder value." But let's tell it like is: The stock has been in veritable free fall ever since Barnes & Noble reported disappointing earnings last month, and it is now 'significantly undervalued." The company has to do everything in its power to change the course of action.

As a sign it means business, Barnes & Noble has retained Lazard to serve as its financial advisor and Morris, Nichols, Arsht & Tunnell LLP to serve as its legal advisor. They've also appointed four members of the board of directors -- George Campbell Jr., William Dillard II, Margaret Monaco and Patricia Higgins -- to "consider all alternatives to increase stockholder value and will recommend a course of action."

Founder and chairman Leonard Riggio, Barnes & Noble's top shareholder, would certainly like to be the one to rescue the company. To that end. he's told the board that he "intends to consider the possibility of participating in an investor group to acquire the company." Plainly stated, the company would ideally like to step off the stock exchange and go private.

As DailyFinance indicated several weeks ago, there are several compelling reasons why Barnes & Noble would pursue this particular course of action. There's the growing e-book business that isn't moving fast enough for shareholders but would be attractive for private equity. There's the market capitalization that just keeps dropping (it was $750 million in July, now it's just over $700 million, and Riggio's own stake is now a lot less than the $450 million he paid to buy Barnes & Noble's College division on behalf of the company). And the third and thorniest reason: a man named Ron Burkle.

The trial launched by Burkle against the board for triggering a "poison pill" when the billionaire's big stock grab last fall nearly hit 20% (it now stands around 19%) has finished, pending only an opinion from Delaware Chancery Court. That opinion is expected any day now, and Barnes & Noble's announcement suggests they believe the judge's verdict won't go their way. By putting itself up for sale, Barnes & Noble also effectively deflates whatever the Delaware Court decides, since the company is now free to entertain offers of a stock buyback that would ordinarily have triggered the poison pill.

As if to confirm this line of thinking, Barnes & Noble issued a proxy statement announcing the annual shareholders meeting on Sept. 28 and said the poison pill measure wouldn't be subject to a vote by the board, stating only that "the company does not intend to present any business for action at the meeting other than as described in this proxy statement."

In other words, that opens the door for Ron Burkle to up his stake to the 36% he's wanted all along, or for him to team up with No. 3 shareholder Aletheia Research & Management for a joint bid for Barnes & Noble. Here's the rub: Barnes & Noble claims its board is "independent," but the chairman of this "Special Committee," Patricia Higgins, was a key witness who testified on the company's behalf that the poison pill measure should stand.

The board also said in its proxy statement that while it "does not know whether [Burkle] will in fact nominate individuals for election as Directors at the Meeting or solicit proxies for that purpose," any board nominees put up by Burkle and his company, Yucaipa, "have NOT been endorsed by the Board, and we urge you NOT to sign or return any proxy card that you may receive from Yucaipa."

The likelihood that an offer for Barnes & Noble that involves Burkle in any way, shape or form would secure this Committee's approval, then, has about as good a chance as seeing flying pigs circulating above the company's Ninth Avenue headquarters.

Where Burkle has leverage, of course, is that an attempt by Riggio to corral a private investor group to buy B&N might trigger another possibility: extended lawsuits by key shareholders. Burkle, of course, is the #2 company shareholder. He's already proven that he can litigate when the need arises. If he were to make a play for the company, and is denied, that might be grounds for another courtroom battle.

Certainly the news of Barnes & Noble's sale was greeted warmly on Wall Street. In after-hours trading, the stock leapt 27% to $16.30 a share. But while Barnes & Noble has taken a necessary step to secure a future it feels comfortable with, the outcome of any potential sale will remain uncertain so long as a primary shareholder like Ron Burkle has the temperament, and the means, to fight any proposals he doesn't like.