September 22, 2010, 4:30 PM

Barnes & Noble’s proxy battle between top shareholders continues

Chairman Len Riggio urged shareholders vote against a proxy put forth by an investment firm.

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In a letter yesterday, Barnes & Noble founder, chairman and biggest shareholder Len Riggio urged shareholders to vote against a proxy put forth by Ron Burkle of investment firm Yucaipa Cos., the company’s second-largest investor.

Riggio’s letter claims that Yucaipa Cos. and Aletheia Research and Management Inc., who combined own approximately 34% of Barnes & Noble’s voting stock, are teaming up to advance proposed rule changes that will help them take over the company for a price lower than it is worth.

Burkle and two other Yucaipa investors are proposing to replace Riggio and two other Barnes & Noble nominees on the board, and change shareholder rules to allow investors to own up to 30% of Barnes & Noble stock, an increase from the current cap of 20% unless a higher cap is approved by the board. Barnes & Noble, parent of BarnesandNoble.com Inc., No. 42 in the Internet Retailer Top 500 Guide, says the cap is in place to keep parties from teaming up to take control of the company without making a fair offer. The proxy vote will take place during Barnes & Noble’s shareholder meeting on Sept. 28.

“Unfortunately, two major shareholders–Yucaipa and Aletheia–have decided that Barnes & Noble is their next target,” the letter says. “We believe that Yucaipa will stop at nothing to gain control over our company without paying all of our shareholders a fair premium, including attempting to inject itself into the sale process more about the potential sale that is currently being overseen by a Special Committee of independent directors.”

In August, Barnes & Noble announced it had formed a committee made up of four directors to evaluate several strategic options, including a possible sale. It also said Riggio informed the board the he was looking into participating in an investor group that would buy the company.

The Riggio letter follows a similar one sent to shareholders on Sept 16. from CEO William Lynch,  and several letters from Yucaipa encouraging voters to take it side.

In the series of letters Barnes & Noble has stressed its stability, citing that in the 11 months since it launched its e-Reading platform, it has attained a 20% share of the digital marketplace for books, and that it maintains an 18% share of the physical book space.

In the Sept. 16 letter, Lynch said eBook sales have been driving the growth of BN.com, Barnes & Noble’s e-commerce  business, generating over 50% year-over-year comparative revenue increases. The company’s competitive advantage of stores and booksellers has fueled the sales of its Nook digital book readers and reading applications for PC, iPhone and other mobile devices, his letter said.

“Having more than 700 of the best and most heavily trafficked retail locations, combined with 40,000 committed and passionate booksellers, affords us the ability to hand-sell and educate millions of people interested in digital reading, in-person every day,” Lynch wrote.

He also stressed the strength of Barnes & Noble’s digital products team and claimed Barnes & Noble is the No. 2 retailer of digital books in the world. He said the company is on track to capture 25% of the market for e-books, e-textbooks and digital newsstands by 2013 and predicted over $1 billion in digital revenue for Barnes & Noble by that year.

The letter also said Barnes & Noble’s textbook sales are strong, with 15% of the $12 billion U.S. textbook market, and predicts more growth for the segment.

“Our expertise and scale as a retail operator, combined with the sophisticated digital platforms and content catalogs we’ve built, have positioned Barnes & Noble as the clear best-in-class partner for colleges and universities that want to modernize their offerings and offer students the maximum choice they will increasingly demand,” the letter says.

Yucaipa claims Barnes & Noble has had a history of poor operating and stock price performance. It also cites analysts’ lack of confidence in Barnes & Noble management’s ability to achieve its sales targets, and notes concerns about the independence of the board. The investment company also points out that Barnes & Noble paid each of its co-CEOs approximately $15 million in compensation this year, despite being new to their positions and having no track record leading the company.

 

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