Friday, March 21, 2008

Borders explores sale, suspends dividend

Borders explores sale, suspends dividend
By Yinka Adegoke

Book retailer Borders Group Inc (BGP.N) on Thursday suspended its quarterly dividend and said it was reviewing strategic options, including the sale of some or all of its businesses, and its shares sank more than 30 percent to a new year low.

The company said its largest shareholder, Pershing Square Capital Management, had agreed to loan it $42.5 million and will receive options to buy a 19.99 percent stake in the company at $7 a share. Without the funding, the company may have faced liquidity issues, it said.

"Borders effectively announced this morning that they are out of cash and took a stopgap funding" from Pershing, Credit Suisse analyst Gary Balter said in a research note.

"We see little opportunity in the near term for Borders to be sold, with the No. 1 candidate Barnes & Noble not likely to pursue a deal," possibly at any price before a Chapter 11 filing, he added.

For its part, industry leader Barnes & Noble (BKS.N) said it had not been approached by Borders investment bankers regarding a purchase but would take a look and review a possible sale if it was contacted.

Borders said Pershing Square offered to purchase some of its businesses in Australia, New Zealand, Singapore and the United Kingdom for $125 million.

Borders has the right, but not the obligation, to require the hedge fund to buy those assets under the backstop purchase offer.

Borders shares had risen as much as 20 percent before the bell but reversed course and sank more than 33 percent in morning trading to a new low. Barnes & Noble, which reported better-than-expected earnings and raised its dividend on Thursday, was up more than 6 percent.

"This will be a challenging year for retailers due to continued uncertainty in the economic environment," Borders Chief Executive George Jones said in a statement. "Looking forward to 2008 and beyond, the company determined that additional capital was required to execute our operating plan."

Without the funding, Borders may have faced liquidity issues in the next few months, Jones said. Borders said it was suspending the dividend to preserve capital for operations and strategic initiatives.

Borders said it had appointed JPMorgan Securities (JPM.N) and Merrill Lynch & Co (MER.N) as financial advisers.

Borders reported net profit of $64.7 million, or $1.10 a share, for the fourth quarter ended on February 2, compared with a year-earlier loss of $73.6 million, or $1.25 per share, that included large charges for closing Waldenbooks stores.

Excluding nonoperating charges and discontinued operations, earnings were $1.44 a share.

Analysts on average expected $1.42 per share, according to Reuters Estimates.

Revenue fell to $1.35 billion from $1.37 billion, but Borders said sales were up 2.8 percent after excluding the impact of an extra week in the year-earlier period.

Jones said that although the company was on track to reach its financial targets, worsening economic conditions would slow its progress.

At Barnes & Noble, net income came to $115 million, or $1.79 a diluted share, for the fiscal fourth-quarter ended February 2, down 9 percent from $126.7 million, or $1.83 a share, a year earlier.

Excluding benefits from property insurance and litigation settlements, earnings were $1.69 a share, compared with the $1.70 analysts expected, according to Reuters Estimates.

Consolidated sales at Barnes & Noble fell about 2 percent to $1.85 billion from the year earlier, which included an extra week.

Barnes & Noble said its board raised its quarterly dividend to 25 cents a share from 15 cents a share, beginning with the June payout.

Borders began a turnaround plan last year. It is closing underperforming Waldenbooks stores, weighing options for its international units, and refocusing on its core U.S. store operations.

The retailer is trying to fend off competition not only from Barnes & Noble, but also from online retailers, where consumers have been turning for cheaper books, CDs and DVDs.

Borders shares were down $2.39 or 33.8 percent, to $4.70 in morning trading on the New York Stock Exchange, while Barnes & Noble was up $1.85, or 6.6 percent, to $29.85.

(Additional reporting by Karen Jacobs in Atlanta, editing by Dave Zimmerman)

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