Barnes & Noble faces USD 100m Riggio bill, bankers say

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A looming payout to Barnes & Noble’s (NYSE:BKS) chairman may be playing a role in the bookseller’s proxy fight, two industry bankers told dealReporter.

Last September, Barnes & Noble acquired B&N College from Louise and Leonard Riggio, the chairman and founder of the New York-based bookseller. Under terms of the USD 596m deal, the sellers issued Barnes & Noble a USD 250m seller note. The first tranche, a USD 100m 8% senior subordinated note, comes due on 15 December, according to an SEC filing.

At the end of July, Barnes & Noble said it had USD 27m in cash on hand and a USD 1bn inventory-backed credit facility of which USD 380m was drawn down. According to a company spokesperson, Barnes & Noble can use this facility to pay the USD 100m note.

In August, Barnes & Noble’s second largest shareholder, an investment firm run by Ron Burkle, launched a proxy fight to gain three seats on Barnes & Noble’s board at the company’s 28 September annual shareholder meeting. In a filing, Burkle claims Barnes & Noble has had poor performance and too many “related party transactions” with the Riggio family.

The B&N College deal and the seller note are “definitely an issue,” said a person familiar with Burkle and the investment firm, Yucaipa Companies.

Prior to the proxy filing, Barnes & Noble announced plans to explore strategic alternatives in an apparent effort to stymie Burkle. The two industry bankers and three additional bankers said they doubt financial sponsors are interested in pursuing a deal to acquire the bookseller.

Private equity firms have had the opportunity to look at Barnes & Noble for at least the past two years, the third and fourth bankers said. The Barnes & Noble spokesperson declined to comment on the strategic alternatives.

While Barnes & Noble holds a dominant position among brick and mortar booksellers, it has been slow to transition to online distribution and electronic books. Revenue from its new ventures has increased in recent quarters, but the expansion has required considerable capital expenditures and accounts for only 10% of total sales.

The third industry banker said it is easy to call for change at Barnes & Noble, but extremely difficult to develop a compelling new strategy. The person familiar said Burkle’s Yucaipa has “proprietary” ideas it hopes to present if it wins the proxy battle.

The second and third bankers said since the company faces problems with its business model there are few financial engineering options to improve its returns. A remote possibility might be for Barnes & Noble to try and find a financial sponsor, like Cerberus Capital, that typically invests at 4x to 5x EBITDA, the third industry banker said.

But this banker said while a leveraged transaction might be doable if the business declines at 3% a year, a 5% to 7% decline would likely prove catastrophic to a buyout. Barnes & Noble projects its in-store sales to fall 1% to 3% for its fiscal 2Q11 and be flat to up 3% for the entire fiscal year that began on 30 April.

The situation likely leaves Riggio as the only potential bidder for the company, the first and fourth banker speculated. Barnes & Noble’s publicly announced strategic alternatives review may be an attempt to soothe critics who complain Riggio offers an uncompetitive price, the first banker suggested.

According to the fourth banker, it will certainly be challenging for the chairman to find banks willing to fund a management buyout.

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