Borders on the Verge of Bankruptcy

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.

Comments

[dingojoe]

Borders UK is a totally separate company from the US Borders. The UK division was sold off two or three years ago. BGP certainly has it's own problems, but this article has nothing to do with BGP.

2009 Nov 23 06:19 PM

[Fingeek8]

This might be the most uninformed blog I've read in the past 3-5 years. Borders troubles are nothing like Linens, there is not a balance sheet problem at BGP. Book stores have a fundamental top-line business model problem they need to solve, which does not require a Chap 7 liquidation. BGP does not have a bond or other debt maturity looming in the near term, and it cash flowed last quarter. BGP's new CEO is paid primarily in options, and BGP's largest investor is Pershing Square, who has stuck by BGP. Therefore, the decision makers have no incentive to push for a bankruptcy.

In a reasonable worst case scenario, a Chap 11 would allow BGP to restructure of store leases, which will save cash flow and allow BGP additional time to rethink it's business strategies. But in no way does a Chap 7 make sense.

2009 Nov 23 06:27 PM

[billddrummer]

I tend to agree with Fingeek8. A prepackaged Chapter 11 (whether now or immediately after the holidays) would allow the chain to restructure its existing leases and continue to operate. It has already struck a deal to close its waldenbooks stores after the holidays, which will save several million in cash flow.

The wildcard is whether the company can continue to get funding for its inventory through factoring, since CIT is out of the game.

But I agree that liquidation talk is premature.

2009 Nov 23 07:38 PM

[Kirk Cheney]

Agreed, though I plan to dig deeper on your conclusion that "the decision makers have no incentive to push for a bankruptcy." I noticed in the latest 10-K that Pershing has made a term loan to BGP. There's a possibility that they could also be buying the bank debt. As far as I know, Pershing isn't a loan-to-own player, but part of me wonders whether this could be Ackman's Eddy Lampert moment. I'm tempted to get long, but I want to do more analysis on Pershing's warrants and the effects of a Chapter 11. If the benefits of restructuring leases benefited the company enough, Pershing might be motivated to put it in Chapter 11, eliminate old equity (including its own), and wholly own the now-leaner company through its debt position.


On Nov 23 06:27 PM Fingeek8 wrote:

> This might be the most uninformed blog I've read in the past 3-5
> years. Borders troubles are nothing like Linens, there is not a balance
> sheet problem at BGP. Book stores have a fundamental top-line business
> model problem they need to solve, which does not require a Chap 7
> liquidation. BGP does not have a bond or other debt maturity looming
> in the near term, and it cash flowed last quarter. BGP's new CEO
> is paid primarily in options, and BGP's largest investor is Pershing
> Square, who has stuck by BGP. Therefore, the decision makers have
> no incentive to push for a bankruptcy.
>
> In a reasonable worst case scenario, a Chap 11 would allow BGP to
> restructure of store leases, which will save cash flow and allow
> BGP additional time to rethink it's business strategies. But in no
> way does a Chap 7 make sense.

2009 Dec 02 11:35 AM

[recession graduate]

They're not mutually exclusive... Pershing could also just be trying to reduce any net exposure. The risk of total wipeout in equity is really unattractive so they've probably hedged it with debt so that in a worst-case restructuring they're still money good. They did the same thing at GGP.

Feb 04 11:53 AM