Crumbling Borders Books Places Debt, Contemplates Sale

Book retailing giant Borders Group will raise $42.5 million by issuing non-convertible senior debt and warrants to its largest shareholder, Pershing Square Capital Management. Borders also said it’s exploring a sale of itself or some of its divisions.

A March 20 statement from the company painted a grim picture for retailers in the coming year.

As part of the deal, Pershing made a backstop commitment to purchase some of Borders’ international businesses for $125 million. The sale would be at Borders’ discretion.

In the private placement, Pershing will provide a secured term loan bearing 12.5% interest and maturing Jan. 15, 2009. The New York-based hedge fund will be issued warrants in the deal to buy 14.7 million Borders shares for $7 each. That was a 1.4% discount to where Borders shares traded before the financing was announced.

Borders, a company with total revenue of $3.82 billion in its fiscal year ending Feb. 2, had only $61 million in cash and cash equivalents on hand at the end of that period. Its net loss for the year was $157.4 million.

Borders chief executive George Jones said in a statement that the financing comes amid “continued uncertainty in the economic environment.”

Borders went with a PIPE because other types of financing are either not there or not cheap, Jones said.

“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,” he said in a statement. “The current credit environment has made many of these alternatives prohibitively expensive or entirely unavailable.”

The Ann Arbor, Mich.-based company said it retained J.P. Morgan Securities and Merrill Lynch for advice on strategic options.

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