Borders for Sale; Largest Shareholder May Buy Divisions
Fasten your seat belts.
Borders is putting itself up for sale or may sell divisions. It has suspended its dividend. It is borrowing some $42.5 million from the hedge fund that is its largest shareholder. That fund may buy parts of the company and is being granted warrants for Borders stock that represent about 20% of the company. (Details below.)
Noting that "this will be a challenging year for retailers due to continued uncertainty in the economic environment" and that "the current credit environment has made many . . . alternatives prohibitively expensive or entirely unavailable," CEO George Jones said that the deal with Pershing provides "funding that gives us adequate opportunity to implement our plans this year and pursue a range of longer term solutions." Without the deal, "liquidity issues may otherwise have arisen in the next few months."
Jones added that Borders believes that its 2009 financial targets "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 planned. Still, we believe our strategic plan remains the right path toward achieving these goals." This plan includes the imminent launching of the company's website on its own, the spread of "new concept" stores that emphasize digital offerings, the display of more titles face out and a related reduction in inventory of 5%-10%, among other initiatives.
Nearly lost in the flurry of news: in the four quarter ended February 2, total consolidated sales rose 2.8% to $1.3 billion. (All such calculations exclude the extra week in the fourth quarter of the previous year.) Net income was $64.7 million compared to a net loss of $73.6 million in the fourth quarter of the previous year. On an operating basis, fourth quarter income was $84.7 million compared to $87.7 million.
For the full year, sales rose 4.2% to $3.8 billion. The net loss was $157.4 million compared to a net loss of $151.3 million for the previous year. There was a $125.7 million charge this year from the sale of Borders's U.K. and Ireland stores.
In the fourth quarter, sales at U.S. Borders superstores rose 5.1% to $957.8 million and sales at Borders stores open at least a year rose 2.1%, the third consecutive quarter of same-store sales gains. Books sales rose 3.2% on a same-store basis but music fell 14.2%. Cafe and gifts and stationery were up 13.3% and 10%, respectively.
For the full year, Borders superstore sales rose 5.3% to $2.8 billion. Same-store sales for the year were up 1.5%.
In the fourth quarter, sales at the Waldenbooks specialty retail division, which includes some smaller Borders stores, fell 17% to $228.3 million. For the full year, sales fell 14.1% to $562.8 million. The decreases reflect the company's closing of 75 Waldenbooks stores during the year. Sales at Walden stores open at least a year rose 1.2% in the quarter and 2.2% for the year.
In the fourth quarter, international sales rose 34.6% to $138.5 million. Without the aid of a weak dollar, sales would have risen 24.3%. For the full year, sales rose 37.2% to $364.8 million (or 26.3% without the currency differential).
In the fourth quarter, international comp-store sales were up 9.3%, mainly because of strong sales in Asia Pacific stores. For the full year, comp-store sales were up 7.9%.
For the "strategic review," Borders has hired J.P. Morgan Securities and Merrill Lynch to explore the sale of the company or of its divisions "for the purpose of maximizing shareholder value."
Under the terms of the financing commitment from Pershing Square Capital Management, which owns approximately 20% of company shares outright and has a representative and an ally on the board, Pershing may buy Borders's Australia, New Zealand and Singapore operations, its Paperchase subsidiary and its remaining interest in Borders U.K. for a "backstop purchase offer" of $125 million. Borders said it believes the businesses are worth "substantially more" than that amount, but said that "the relative certainty of this arrangement provides the company with valuable flexibility to pursue strategic alternatives." Borders can decline or require the sale and can sell to any other company. The offer runs until next January 15.
Borders granted Pershing Square 14.7 million warrants to purchase company stock for $7 a share for up to seven and a half years, an amount of stock equal to nearly 20% of fully diluted company shares. (Borders stock closed yesterday at $7.10, a low for the year and in the range of its opening price in 1995.)
The Pershing deal is binding on Pershing until April 4 during which time Borders can pursue alternative financing arrangements. Borders agreed not to issue any preferred stock or convertible securities without Pershing's approval while Pershing agreed not to sell or transfer any of its shares or warrants until the end of the year unless there is a change of control at Borders. Pershing also agreed that through the 2009 annual shareholders' meeting, it will not try to prevent Borders from maintaining a majority of independent directors. The full Borders board has approved the deal.