At Borders Group,
The Next Best Seller
Might Be Itself
By JEFFREY A. TRACHTENBERG and KAREN RICHARDSON
March 21, 2008
You don't have to read between the lines to see that the nation's second-largest book retailer is in financial trouble.
In a sign of how difficult the book market has become for traditional book chains, Borders Group Inc. put itself up for sale. It also revealed that worries about a possible cash crunch had prompted it to borrow money from its biggest shareholder, Pershing Square Capital Management LP, headed by activist investor William Ackman.
Borders shares fell $2.03, or 29%, to $5.07 on Thursday in 4 p.m. composite trading on the New York Stock Exchange, as the company noted that the troubled credit markets had closed off usual avenues of financing. Borders also said it was suspending its dividend. The company has hired J.P. Morgan Securities Inc. and Merrill Lynch & Co. to help it review strategic alternatives. "We could sell parts of the business, or we could sell the entire business," said Borders Chief Executive George Jones.
Barnes & Noble Inc., the nation's largest book seller, emerged as a contender for its rival. The company's chairman, Leonard Riggio, in an interview Thursday, said that he would consider any presentation by Borders's investment bankers. "I think it would be the height of irresponsibility for us not to look at something presented to us," said Mr. Riggio, who owns 16.6 million shares, or 27.6%, of the Barnes & Noble, making him the company's largest investor. "If they want us to take a look, we would be pleased to do so. We also feel we would be obliged to do so."
With Borders stock now trading at less than a quarter of where it was a year ago, the company's market capitalization is now around $300 million. A merger could save several hundred million dollars in costs, says one observer, although it likely would provoke strong opposition from publishers. Borders operates 509 superstores in the U.S., while Barnes & Noble operates 713.
Pershing, which could facilitate a merger, is expected to back a combination. The investor, which has a 26% interest in Borders -- through 18% of shares outstanding and equity swaps amounting to an 8% stake -- also owns 10.9% of Barnes & Noble, making it the chain's second-biggest shareholder.
Barnes & Noble shares rose $2.27, or 8.1%, to $30.27 Thursday on the NYSE, even as the retailer reported a slight drop in its fourth-quarter net income.
Despite its financial pressures, Borders posted a profit in the fourth quarter amid higher sales, compared with a year-earlier loss, which included charges related to its U.K. business. Still, its chief executive said in a statement that "this will be a challenging year for retailers due to continued uncertainty in the economic environment." Barnes & Noble, likewise, cautioned that it expected sales at stores open more than a year to be "slightly negative" for the first quarter, although the chain said it expected full year comparable-store sales would be "slightly positive."
Traditional book chains face multiple threats. Several of the country's biggest discounters, including Wal-Mart Stores Inc. and Costco Wholesale Corp., have built thriving businesses with best-sellers. Elsewhere, Amazon.com Inc. dominates book sales on the Web, offering a huge selection of titles and aggressive discounting. Booksellers have also had to deal with book sales that are generally stagnant.
For the independents, the book-selling landscape is also difficult. "There's a lack of big books," says Roberta Rubin, owner The Book Stall at Chestnut Court in Winnetka, Ill. "We need the headliner authors to give us a jolt. And I just think that publishers are having the same issues. I don't hear them telling us how great things are. The publishing representatives I talk to say they are worried about their jobs."
Mr. Jones, who became chief executive of Borders two years ago, has set it on an aggressive and expensive new path. His plan called for the retailer to refocus on its U.S. superstores while closing nearly half of its Waldenbooks outlets and selling off most of its international operations.
Earlier this year, he opened a new prototype store in Ann Arbor, Mich., and the retailer will relaunch its own Web site by May 3, which will end its ties with Amazon.com. But all that costs money, and credit has gotten more difficult to come by.
Helping spark Thursday's announcement was a setback suffered last week, when a proposed sale of its Australia/New Zealand businesses fell through. That would have provided a substantial financial boost.
Over the past four days, Borders has worked with Pershing -- one of whose executives, Richard McGuire, is on Borders's board of directors -- to arrange a loan. Pershing has agreed to provide a $42.5 million senior secured term loan that matures Jan. 15, at an interest rate of 12.5% a year. Mr. Jones said the investment means that Borders is on firm financial footing and will be able to go forward with its U.S. growth plan.
"Absent these measures, liquidity issues may otherwise have arisen in the next few months," Borders said in a statement.
Borders has the right to sell its foreign subsidiaries to Pershing for $125 million, an option that lasts until Jan. 15. This is meant as a "backstop" for Borders, if the chain can't find another buyer, as the foreign operations could go for at least $200 million. At the same time, Pershing gets warrants to buy another 19.9% of Borders stock for $7 a share, a sign it believes the company is worth at least that much in a full sale. Mr. Ackman said in a statement Borders is a "great franchise."
Write to Jeffrey A. Trachtenberg at and Karen Richardson at