Borders Tanks, or Why I Can't Get Rehired!

Gee, this explains a lot...can you say "hiring freeze"? If i remeber correctly, this company had a 34% profit in 2005 0r 2006. Hmmmmmmmm, Barnes and Nobel sounding good!

Borders shares slide after news of strategic review

Bookseller swings to profit but cancels dividend to conserve capital

By Robert Daniel & Michelle Donley, MarketWatch
Last Update: 10:54 AM ET Mar 20, 2008

NEW YORK (MarketWatch) -- Shares of Borders Group Inc. plunged more than 20% in early trading Thursday after the bookseller said it would review alternatives for its business, including a possible sale of part or all of the company.

Borders (BGP: news) also said Pershing Square Capital Management LP, its largest shareholder, proposed a financing plan to ease what might have become a liquidity problem.

The Ann Arbor, Mich., bookseller determined that it needed additional capital for 2008, and the difficult credit markets rendered some financing alternatives unavailable, Chief Executive George Jones said in a statement.

Absent a financing deal, "liquidity issues may otherwise have arisen in the next few months," the executive said.

Analysts at Goldman Sachs see the news as a sign that Barnes & Noble Inc. (BKS: news) could step in to buy the company.

"We believe that BGP's financial distress diminishes the impact of antitrust considerations, though we presume that BKS remains averse to taking on leases that would increase store overlap," they wrote in a note Thursday morning. "A bankruptcy filing for BGP, not likely given Pershing's investment, would enable BKS to break its leases."

Borders reported early Thursday that it swung to a fiscal fourth-quarter profit of $1.10 a share from a year-earlier loss of $1.22 a share. It also said it was omitting its quarterly dividend to conserve capital. Borders retained J.P. Morgan and Merrill Lynch for financial advice as it reviews its options.

Jones said 2008 will be a "challenging year for retailers." By resolving its funding needs for 2008, he said, Borders believes it can meet its 2009 financial goals, albeit later than it had hoped.

Three-part financing proposal

Pershing Square Capital Management LP, the New York investment firm and Borders's largest holder, has committed to a three-part plan, which the independent directors of Borders have approved.

First is a $42.5 million secured term loan to Borders at a 12.5% annual interest rate; the loan matures Jan. 15, 2009.

Second, Pershing committed to a "backstop purchase offer." This gives Borders the option until Jan. 15, 2009, to sell its Paperchase, Australia, New Zealand and Singapore units and its 17% interest in Borders U.K. to Pershing for $125 million, "after the company has pursued a sale process to maximize the value of those assets."

In the third point of Pershing's plan, Borders would issue to Pershing 14.7 million warrants to buy shares at $7 each. That would be just under a 20% stake in Borders. The stake would be protected against dilution if Borders were to issue more equity, except in the case of shares issued for employee stock options.

The three-part proposal is binding on Pershing Square until April 4, until which, Borders has the right to seek better financing deals. If Borders finds a better deal, it can end the Pershing agreement with no break-up fee, although Pershing can request reimbursement of reasonable expenses, Borders said.

Dividend omitted, profitability up

Borders, which operates more than 1,100 stores worldwide and employs more than 30,000 people, last paid out a dividend of 11 cents a share on Feb. 10 to holders of record Jan. 2.

For the quarter ended Feb. 2, Borders reported net income of $64.7 million compared with a loss of $73.6 million in the year-earlier period. Adjusted earnings from continuing operations were $1.44 a share compared with $1.45.

Revenue fell 2% to $1.35 billion from $1.37 billion. Sales fell 2.2% to $1.32 billion from $1.35 billion.

At the U.S. Borders Superstores division, comparable-store sales rose 2.1%, the third consecutive quarter of positive sales on this basis, which excludes the effects of acquisitions and divestitures.

At the U.S. unit, same-store book sales rose 3.2% while "music continued its steep sales decline," with comparable sales off 14%, Borders said. The company is reducing music inventories to better present merchandise and to make room for offerings with fatter profit margins.

Comparable-store sales in the international segment rose 9.3% in the quarter as Asia-Pacific stores performed strongly, Borders reported. Total international sales rose 35%; excluding the impact of currency translations, overseas sales rose 24%.

Same-store sales at Waldenbooks rose 1.2% in the quarter. Borders said it closed 75 stores in this chain in 2007 and will continue to close stores that aren't meeting financial targets.


Robert Daniel is MarketWatch's Middle East bureau chief, based in Tel Aviv.
Michelle Donley is a MarketWatch news editor based in New York.