Borders on the Verge of Bankruptcy

| About: Borders Group, (BGPIQ)

After British chain WHSmith backed out of a deal with Borders (BGP), the U.S. megastore bookseller is desperately looking to stave off bankruptcy and Chapter 7 liquidation.

I love Borders and have been an avid shopper at countless Borders stores near where I have lived in D.C., L.A., New York, London and elsewhere on the road. But, honestly, it doesn’t make sense to me that WH Smith was in the bidding for Borders in the first place. WHSmith are a more a news agent.

As for liquidation, this is what I fear. Look at what happened to Linens ‘N Things, another potentially viable company sunk by leverage in an overpriced private equity deal. Just as the credit crunch hit, they ran into funding problems. Starved for capital, they were liquidated – a deadweight loss to the economy.

Below, the Telegraph reports on Borders:

The high street retailer is thought to be holding discussions with groups including HMV as the threat of collapse draws nearer.

Borders was bought in July from Channel 4 chairman Luke Johnson’s Risk Capital Partners, in a management buyout backed by Valco, a private equity firm.

However, the company has been hit by competition from supermarkets and the increasing strength of online retailers as the recession continues to hurt consumer spending. Borders has also suffered from the tightening in the credit insurance market, which has made it difficult to obtain stock from suppliers.

The company’s management is now worried that it does not have enough cash to trade successfully through the busy Christmas period.

Note: this article originally referred to these moves as applying to Borders US. However, the Valco-owned entity involves only the UK operations.