Burkle had a job and a union card at 13. Two years later, Ron’s father told him he would buy his son a car. All Ron had to do was save enough cash from his job to buy the car. If Ron could do that, his father would let Ron keep the cash as long as he invested it. The car would be a gift.
Ron saved $3,000. He used the cash to buy shares of American Silver Company. His $3,000 became $30,000."We always try to buy companies that are doing O.K. but that have some issues. We buy at a price that if they just muddle through, we don't go broke. And if they do better, we make a lot. Since I was 13, I've been buying things because they are ridiculously cheap.”[/i] Ron bought the car himself. At 15, he was still too young to drive. So he kept the car in the garage and listened to the radio.
Burkle graduated from high school at 16. He went to California State Polytechnic and studied to be a dentist: [i]“It was a horrible idea.” He dropped out. So Burkle was a college drop-out by 19. But he still had his grocery store job and his investing money. He kept working, saving, and buying stocks.
Burkle climbed the company ladder: “I started working at a grocery store my father had when I was about 13 years old. He was the store manager. I joined the union when I was 13. Had various positions: checker, system manager, manager, district manager, vice president. Ended up being the executive vice president of the company and part time at the parent company working on technology and other issues there.”
Fast forward to1981. Burkle is 28. And Stater Brothers is for sale: “They put the company up for sale. It didn’t sell. And my boss, who was head of the parent company for consumer products, asked me if I would make a bid. Didn’t know what all that entailed. Didn’t go to college for finance or take any classes in that regard. So I went out and got the best partner we could with Berkshire Hathaway.”
And that’s how Ron Burkle got to know Charlie Munger. Berkshire Hathaway (BRK.B) is famous for being Warren Buffett’s investment vehicle. It is. But it’s also Charlie Munger’s investment vehicle. Warren is the Chairman. Charlie is the Vice Chairman. And Charlie spends more time in California.
Burkle was searching California for an LBO partner. He knew someone who knew Munger. The two men met. Charlie agreed to a simple deal. Burkle and Berkshire would put up equal amounts of cash. Burkle would get 51% of the company. Berkshire would get 49%.
On Friday, February 5th, 1982 Burkle put in his bid for Stater Brothers. He called his wife to tell her he owned the company. Then went off to work: “Made a bid at 6 in the morning. Thought we had bought the company. And at 3 o’clock they came out and fired me. They said management can’t be out there as renegades. So I’m unemployed, and I didn’t know what to do. I felt pretty horrible. My dad had worked there almost his whole life. It was the only place I had ever worked. I thought it was a once in a lifetime opportunity to own a company, and I’d missed it.”
Another came knocking: Market Basket. It was a southern California grocery chain with unfunded pension liabilities. Kroger owned it. Burkle wanted to buy it. But he needed cash. Berkshire always had cash. So Burkle met with Munger.
Burkle brought three notebooks full of long-term plans. Munger tossed them aside: “What are these for? Manage to the opportunity, not to the plan.”
Charlie and Warren gave Burkle credibility. He needed that. But, as it turns out, Burkle didn’t need their cash. He sold 13 of the 14 stores so fast financing wasn’t a problem. The deal paid for itself.
In 1986, Burkle created a fund. He called it Yucaipa. That’s the California town where Burkle lived and Stater Brothers was founded. Like its name, the fund stuck close to home. For Burkle, home is groceries. So that’s what Yucaipa invests in: “I think we’re probably best known for retail. So supermarket companies all around the United States. We were the largest shareholder at Kroger at one time, which is the largest supermarket company. Also we owned Ralphs supermarkets in Southern California. We had Dominick’s. In the Northwest we had Fred Meyer (and) QFC. More in the Midwest we had Falley’s (and) Food for Less…And on the East coast we’ve had Pathmark and A&P.”
Times have changed for Yucaipa. The biggest change is size. Yucaipa started small. It bought Falley’s, a Kansas grocery chain, for just $35 million. That was a big deal for Yucaipa in 1987. Today, Yucaipa is around $9 billion. A $35 million deal like Falley’s can’t make a difference anymore. Yucaipa needs to find bigger fish.
And the financing has changed. Yucaipa bought Falley’s with $26.5 million in Drexel Burnham Lambert junk bonds. Part of what made that deal possible for Yucaipa was investor appetite for Drexel’s junk. But the other part was low prices. Businesses, like their shares, were cheap in 1987. Not so much in 2007.
That’s when the Barnes & Noble (BKS) story started heating up. But it’s not when Burkle first got a close look at Barnes & Noble.
Burkle met Barnes & Noble founder Len Riggio back in 1999. Yucaipa had just bought Alliance Entertainment, a big distributor of music and video games. Barnes & Noble was a big customer. It paid Alliance around $400 million a year. Burkle went to visit his customer in New York. And Riggio agreed to personally invest in Alliance.
Barnes & Noble was a public company. So why was Riggio personally investing in a key supplier?
Because Riggio treats Barnes & Noble like a controlled company. He doesn’t see much of a line between himself and his company: “I had been the founding shareholder of Barnes & Noble, had always been the largest shareholder of Barnes & Noble, had from time to time bought more shares in the company, then and now, you know, I have a preference for being the largest shareholder of Barnes & Noble being the founder. I think it is good for the company and good for me.”
The problems between Burkle and Riggio started with Riggio’s investment in Alliance. But they became what they are today because Riggio sees Barnes & Noble as an extension of himself. That makes perfect sense in a private company. It even makes sense in a public company where the biggest shareholder, like Warren Buffett, puts all his eggs in one basket. But Riggio never put all his eggs in Barnes & Noble’s basket. Instead Riggio decided it was okay for him to be a major shareholder in companies aside from Barnes & Noble, but it wasn’t okay for Barnes & Noble to have major shareholders aside from him. It was an open relationship for the husband, but not for the wife.
In 2007, Bill Ackman of Pershing Square bought 10% of Barnes & Noble. Riggio reacted jealously. Since Barnes & Noble’s IPO, Riggio had allowed his stake in the company to shrink. But now he bought more than 9% of the company, raising his position from 22.8% in 2006 to 31.9% in 2008. Ackman sold out of Barnes & Noble in 2008
At the time of the 2008 stock market crash, Riggio owned more than 30% of Barnes & Noble. It didn’t look like anyone could challenge him for control of the company he founded. And no one would have if Riggio reacted normally. But Riggio’s view of Barnes & Noble as an extension of himself, his memory of the recent Ackman scare, and his contempt for Burkle mixed together and lead Riggio to do some strange things in the year ahead.
In October 2008, the stock market was in free fall and Ron Burkle was sitting on $7 billion in cash. The year before, stock prices were too high. Burkle felt he had to sell. And he did.
Now, during the crash, Burkle saw another once in a lifetime opportunity. He called six top members of his team to an eight hour Sunday meeting: “Everybody was afraid the world was coming to an end. I wasn’t. This is an opportunity. We can buy phenomenal companies and brands at ridiculous prices.”
The two stocks Burkle focused on were Whole Foods (WFMI) and Barnes & Noble. He wanted to put one-third of Yucaipa’s billions into stocks right away. Now was the time to act.
Burkle started by calling Riggio. He told Riggio he was thinking of investing in Barnes & Noble. Within days, Yucaipa bought 8% of Barnes & Noble. Burkle called Riggio again. This time Riggio told Burkle they should meet. The two met at the Bowery Hotel in Manhattan in March 2009.
They started by talking about their troubled investment in Alliance. Riggio wanted out. He asked Burkle to buy him out at a reduced price. Burkle said no. Then Riggio tried to get Burkle to leave Barnes & Noble alone: “I may have told him that I didn’t like the idea that he was invested in Barnes & Noble, that I was completely unhappy with our partnership at Alliance for many, many years. I had tried for all of ten years to extricate myself from the partnership…I didn’t think highly of his judgment and didn’t think highly of him as a partner.”
Burkle told Riggio Barnes & Noble should partner with a technology company. Burkle mentioned the name HP (HP). He also mentioned the name Bill Ackman. Burkle told Riggio he had spoken with Ackman about Barnes & Noble buying Borders (BGP). Riggio would hear none of it: “With all that’s going on, I don’t want one more – I don’t want exposure to one more retail store.” Burkle conceded the point: “I can’t argue with that. That makes sense.”
Burkle kept his investment in Barnes & Noble. He didn’t ask for further changes. And he didn’t get any. Until, in August 2009, Barnes & Noble announced it was buying Barnes & Noble College from Riggio. Barnes & Noble would pay Riggio $596 million and get 637 bookstores on college campuses in return. Burkle was horrified: “So he said he was trying to get away from these things, and here he kind of did the biggest one he’d ever done. And it just surprised me. It was just counter to everything I would expect him to do.”
And that’s why Ron Burkle wants control of Barnes & Noble. He started by making an investment in the company. After the Barnes & Noble College announcement he felt betrayed and he felt his investment was at risk. Riggio said he didn’t want exposure to any more stores. And Riggio was reducing his own exposure to stores. He was just doing it by increasing Barnes & Noble’s exposure to stores.
That brings us to the proxy fight and the September 28th annual meeting where shareholders will decide between Ron Burkle and Len Riggio.
More on those topics tomorrow.
Disclosure: Author owns shares of Barnes & Noble (BKS)
Sources: Strine’s Opinion, Burkle’s Testimony, The Other Ron Burkle, Burkle Gets Bill Clinton’s Ear, It Gets Uglier