Borders Considers Sale
by Jim Milliot -- Publishers Weekly, 3/19/2008 1:08:00 PM
The possibility that Borders may one day be for sale has been discussed in publishing circles for several years, but that chance became more likely with the early morning announcement from the bookstore chain that it had hired J.P. Morgan Securities and Merrill Lynch to help it explore strategic alternatives. Those options, Borders said, include the possible sale of the company and/or some of its divisions.
The decision to seek a possible sale appears to have been driven by the need to raise additional financing to allow the chain to move forward with its restructuring plans. CEO George Jones said that given the tight credit market it was becoming expensive, and at times impossible, to find new funds. To help ease that situation, Pershing Capital, the private equity firm that has a large stake in Borders and two board seats, has agreed to lend the company $42.5 million. In addition, Pershing has agreed to acquire Borders’s Australian, New Zealand, Singapore and Paperchase subsidiaries for $125 million if Borders cannot find another buyer at a better price. A deal to sell the Australian/New Zealand unit fell apart last week.
The infusion of capital from Pershing will give Borders enough money to continue to revamp its operations. Still, Jones said the completion of its turnaround may take longer than expected. “Overall, we believe that the 2009 financial targets we set back in March of last year remain attainable, yet within the current economic environment, we will be slowed in our progress and expect that we’ll reach them later than originally anticipated. Still, we believe our strategic plan remains the right path toward achieving these goals,” Jones said.
Borders's complete announcement is below.
Borders Group, Inc. today announced the launch of a strategic alternative review process. J.P. Morgan Securities Inc. and Merrill Lynch & Co. have been retained as the company’s financial advisors to assist the company as it explores strategic alternatives. The review process will include the investigation of a wide range of alternatives including the sale of the company and/or certain divisions for the purpose of maximizing shareholder value. The company can give no assurances that a transaction of any kind will occur.
The company today also reported results for the fourth fiscal quarter and full year 2007, ended Feb. 2, 2008. As detailed below, on an operating basis, fourth quarter income from continuing operations was $84.7 million or $1.44 per share compared to $87.7 million or $1.45 per share a year ago.
In addition, the company today announced that Borders Group has received a financing commitment from Pershing Square Capital Management, L.P. on behalf of certain of its affiliated investment funds. Under the terms of the commitment, Pershing Square has made a commitment to lend $42.5 million to the company and an offer to purchase, at the company’s discretion, certain of the company’s international businesses pursuant to a $125 million backstop purchase commitment, in each case subject to the satisfaction of customary closing conditions.
“This will be a challenging year for retailers due to continued uncertainty in the economic environment,” said Borders Group Chief Executive Officer George Jones. “Looking forward to 2008 and beyond, the company determined that additional capital was required to execute our operating plan, and as a result we began to explore various financing options. The current credit environment has made many of these alternatives prohibitively expensive or entirely unavailable. We are pleased to have the confidence and backing of our largest shareholder, Pershing Square, which has agreed to provide funding that gives us adequate opportunity to implement our plans this year and pursue a range of longer term solutions through the strategic alternatives review process. We believe that consummation of the transactions under the commitment will make us fully funded for 2008, where absent these measures, liquidity issues may otherwise have arisen in the next few months. Furthermore, we believe that resolving our 2008 funding needs and positioning Borders to perform the way we believe it can, puts our company in a position to succeed in future years.”
Jones continued, “Overall, we believe that the 2009 financial targets we set back in March of last year remain attainable, yet within the current economic environment, we will be slowed in our progress and expect that we’ll reach them later than originally anticipated. Still, we believe our strategic plan remains the right path toward achieving these goals.”
Financing Commitment
The financing commitment from Pershing Square, which is expected to be completed within the next two weeks, consists of three main components:
A $42.5 million senior secured term loan maturing January 15, 2009 with an interest rate of 12.5% per annum.
A backstop purchase offer that will give the company the right but not the obligation, until January 15, 2009, to require Pershing Square to purchase its Paperchase, Australia, New Zealand and Singapore subsidiaries, as well as its approximately 17% interest in Bookshop Acquisitions, Inc. (Borders U.K.) after the company has pursued a sale process to maximize the value of those assets. Pershing Square’s purchase obligation is at a price of $125 million (less any debt attributable to those assets) and on customary terms to be negotiated. Proceeds of any such purchase by Pershing Square are to be first applied to repay amounts outstanding under the $42.5 million term loan. Although the company believes that these businesses are worth substantially more than the backstop purchase offer price, the relative certainty of this arrangement provides the company with valuable flexibility to pursue strategic alternatives. The company has retained the right, in its sole discretion, to forego the sale of these assets or to require Pershing Square to consummate the transaction. Pershing Square has no right of first refusal or other preemptive right with respect to the sale of these businesses by the company to other parties.
The issuance to Pershing Square of 14.7 million warrants to purchase company common stock at $7.00 per share for a term of 7.5 years. These warrants represent 19.99 % of the fully-diluted shares of the company on a pro forma basis giving effect to the issuance of the shares underlying the warrants, excluding employee stock options. The warrants will be cash-settled until the issuance of the underlying shares is approved by the company’s shareholders, and in certain other circumstances. The warrants have full anti-dilution protection including, among other things, adjustments in the event of future equity issuances so as to ensure that the warrants will at all times be exercisable for 19.99% of the fully-diluted shares of the company, excluding the impact of dilution in connection with employee stock options.
The Pershing Square financing commitment is subject to customary conditions, including the approval of the terms of the transactions by the lenders under the company’s revolving credit facility and the execution of definitive agreements.
The Pershing Square financing commitment is binding on Pershing Square until April 4, 2008 and allows the company, in the meantime, to pursue alternative financing arrangements on more advantageous terms (subject to Pershing Square’s right to match those terms). Should the company determine that more favorable alternatives exist before April 4, 2008, it has the ability to terminate the Pershing Square financing commitment with no break-up fee. Pershing Square also will be entitled to receive reimbursement of its reasonable expenses.
In conjunction with the consummation of these arrangements, the company will agree not to issue any preferred stock or securities convertible into preferred or common equity or implement a shareholder rights plan without Pershing Square’s consent, and Pershing Square will agree not to sell or transfer any of its shares or warrants (or to cash settle any warrants) until the end of 2008 unless a change of control or other extraordinary transaction involving the company is announced. Pershing Square also agreed that, through the 2009 annual shareholders’ meeting, it will not seek to prevent the board of the company from maintaining a majority of independent directors. The full text of the Pershing Square commitment letter will be filed by the company with the Securities and Exchange Commission in a Current Report on Form 8-K.
The Pershing Square financing commitment was unanimously approved by the disinterested members of the company’s board of directors after a full review by the company and its financial and legal advisors of the Pershing Square commitment and other alternatives.
The board of directors has suspended the company’s quarterly dividend program in order to preserve capital for operations and strategic initiatives.
