Who Will Buy Borders?

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Includes: BGPIQ, BKS
by: T.S Donnely

With the competition of other purchase outlets such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), and monster retailer Barnes & Noble (NYSE:BKS), Borders (BGP) is hard up on increasing its earnings and revenue share in the bookstore market.

After releasing declining earnings for this past quarter ending February 2nd, Borders contemplated selling the company and/or parts of it. Borders reported a small but alarming fall, due to the nature of the current economy, in profits compared to the same quarter last year. The company saw a drop of 3.4%, with earnings of $84.7 million as compared to $87.7 million a year ago. It also reported a fall in revenue of 2% of $1.35 billion from $1.37 billion.

Since the company believes its earnings will continually decline because of recessionary worries of the economy, the Ann Arbor, Michigan, bookstore chain has sought out banks to help mitigate its options for a seller. It has since hired JP Morgan (NYSE:JPM) and Merrill Lynch (MER) to assist in carrying out a possible buyout transaction.

One of the potential buyers is retail bookstore rival Barnes & Noble. Some bankers believe Barnes & Noble will not consider buying Borders for a few reasons, one being that they both operate in the same neighborhoods and Barnes & Noble will not want to acquire locations in which it is already operating. The other bankers believe Borders' new high interest loan from Pershing Square Capital Management makes it an unattractive buyout.

Furthermore, hedge fund manager Pershing Square Capital Management, who is also its largest shareholder, has agreed to lend Borders $42.5 million. Borders believed that, even with a suspension of its quarterly dividend (which it will be adding to operations), liquidity would be a problem in carrying out its operational plans this coming year if it did not receive the additional funding from Pershing. Also included in the deal was an offer for Pershing to purchase certain divisions of Borders' international operations.

Borders' future looks foggy, but it is still setting forth efforts to put a new fresh face out there, with its concept stores still rolling out and 13 more locations on deck, and its own website debuting in May to expand its online presence.