Cash-strapped retailer Borders put itself up for sale, stoking speculation that activist investor Bill Ackman is looking to merge the battered book chain with its larger rival, Barnes & Noble.
Borders, the nation’s second-largest book retailer, suspended its quarterly dividend and said it has taken a $42.5 million loan from Ackman’s hedge fund, Pershing Square Capital Management. The firm, whose 18 percent stake makes it Borders’ largest investor, also will receive options to buy an additional 20 percent of the company for $7 a share.
Shares of Borders, which separately reported a 9 percent profit drop, plunged $2.03, or 29 percent, to $5.07.
Ackman’s moves could be a last-ditch effort to save his flagging investment in Borders, whose shares were above the $20 level when he initially announced an 11 percent stake in late 2006. Under the financing deal, Borders also has the right to sell its overseas units to Pershing Square – a move that could be designed to pacify antitrust regulators in the event of a merger.
Borders, which has hired JPMorgan and Merrill Lynch to explore strategic alternatives, said the stopgap financing would protect it from bankruptcy in the near term. That could buy time for Borders to ink a merger with the bigger, healthier Barnes & Noble, which yesterday reported better-than-expected fourth-quarter results.
But Credit Suisse analyst Gary Balter noted that the financing package from Pershing Square is pricey, and clouds the company’s longer-term outlook. The loan carries a stiff interest rate of 12.5 percent, and the options granted to Ackman’s fund would dilute the value of the stock.
“We see little opportunity in the near term for Borders to be sold, with the No. 1 candidate Barnes & Noble not likely to pursue a deal at this price or possibly any price before Chapter 11,” Balter said.
Indeed, a Borders bankruptcy would allow it to exit leases of stores located near a Barnes & Noble, which are generally thought to have better locations than Borders. That would help it eliminate overlapping stores – a key hurdle for any prospective combination.
But with the cash infusion from Pershing Square, a Borders bankruptcy is “not likely,” said Goldman Sachs analyst Matthew Fassler. On a conference call yesterday, Barnes & Noble CFO Joseph Lombardi said his company hasn’t been contacted by bankers about Borders, but would take a “good look” if it were.
Borders CEO George Jones, who is looking to turn the chain around with a more interactive, tech-savvy store format, said the soured economy and a disappointing holiday season sapped cash reserves more than expected. Without the cash infusion from Pershing Square, the credit crunch may have inflicted “liquidity issues” on Borders in the coming months, Jones said.