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Borders Group (BGP), the bookstore chain, reported earnings before yesterday morning's open and announced that it had retained JPMorgan (NYSE:JPM) and Merrill Lynch (MER) to explore strategic alternatives. It has also arranged a special $42.5 million financing arrangement with its largest investor, Dan Ackman’s Pershing Square Capital, a prominent activist hedge fund (BGP 4Q Earnings Release).

Shares had already lost 2/3 of their value over the last year heading into today’s trading and were also got torched yesterday. They were down 40% to around $4.30 on huge volume (BGP 1 Year Chart (pdf file)).

The stock is interesting to me at this point. The company is struggling due to competition from online booksellers like Amazon (NASDAQ:AMZN) and Barnes & Noble (NYSE:BKS), a hefty debt load, a general cultural trend away from reading books, as well as the tough macroeconomic environment.

However, two prominent value investors are its largest shareholders: Pershing owns 10.6 million or 18% of outstanding shares, and David Dreman’s Value Management owns 4.8 million or 8% of outstanding shares. Citadel Investment Group also owns 3.2 million or 5.4% of outstanding shares (WSJ BGP Institutional Holdings)(subscription only).

That’s quite a list of value investors and turnaround specialists who combined own about one-third of Border’s outstanding shares. Furthermore, these holdings are as of the beginning of the year - before yesterday’s 40% haircut.

Fundamentally, the company isn’t making any money and it has a lot of debt: about $500 million net. On the other hand, same store sales have stabilized and been positive for three straight quarters.

Overall, the possibility of a sale and the presence of these well-respected and highly successful value investors piques my interest. I think it's worth nibbling at here, since it is hard to imagine things getting any worse and there could actually be some upside.

Disclosure: Top Gun is long shares of Border’s Group (BGP).