Barnes & Noble Creates a Poison Pill

In early January, billionaire investor Ron Burkle disclosed in a filing to the SEC that his Yucaipa Companies had purchased 8.3% (over 4 million shares) of Barnes & Noble stock. According to Publishers Marketplace (PM), two days later, Goldman Sachs upgraded its rating of the bookchain's stock from "sell" to "neutral."

Last week, Burkle filed new papers with the SEC, revealing that he had more than doubled his stake in B&N. Publishers Marketplace says that while Burkle's 16.8% holding is enormous, it is "still only about half as much as the big block of stock controlled by [B&N] chairman Len Riggio":

[The] question is how Burkle hopes to cash in on what has become a large position in Barnes & Noble. Together Burkle and Riggio truly control the company. Given Burkle's investment history, expect renewed speculation on the possibility of BN going private.

Then on Monday, Burkle announced yet another SEC filing revealing a further accumulation of B&N stock, raising his stake to 17.8%.

B&N's response was rapid. On Tuesday, the world's largest bookseller issued a press release announcing that its Board of Directors had approved the adoption of a "poison pill," which would be "exercisable if a person or group, without Board approval, acquires 20% or more of Barnes & Noble's common stock or announces a tender offer [hostile takeover] which results in the ownership of 20% or more of Barnes & Noble's common stock."

A poison pill is a strategy a company employs to ward off an unwanted suitor. The goal is to make the target company so expensive that the acquirer gives up its attempt to take it over.

B&N's poison pill is a very common approach called the shareholder rights plan. In this strategy, B&N announced its "stockholders will receive rights to purchase shares of a new series of preferred stock in certain circumstances."

If Burkle should acquire 20% of B&N or if he announces a hostile takeover that gives him 20% of B&N's stock, the shareholders will be permitted to convert their rights into common stock. The press release explains:

If the rights become exercisable, all rights holders (other than the person triggering the rights) will be entitled to acquire Barnes & Noble's common stock at a 50% discount.

More stock dilutes the value of the acquirer's holdings and makes it more expensive for him to continue trying to buy the company.

Under the terms of the Rights Plan, the rights will expire on November 17, 2012.

The ball is back in Burkle's court.