Borders Group (BGP), the bookstore chain, reported earnings before yesterday morning's open and announced that it had retained JPMorgan (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 (AMZN) and Barnes & Noble (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).