Borders agrees to sell itself for $215 million
June 30, 2011 11:44 PM ET
By MAE ANDERSON

(AP) - Borders Group Inc. said late Thursday it agreed to sell itself to private investment firm Najafi Cos. for $215 million and is seeking court approval for the agreement.

Najafi Cos., which owns the Book-of-the-Month Club, will also assume $220 million in debt.

The agreement is tentative and is what is known as a "stalking horse" bid for a company under bankruptcy protection. The bid will open an auction for the company and its assets, so a higher bid is possible.

A bankruptcy court hearing on the deal is set for July 21. Borders, the second largest U.S. traditional book store chain, filed a separate motion to liquidate in case the court does not approve an auction.

Najafi Cos. has been a speculative suitor for the Ann Arbor, Mich.-based company, although Borders has not previously confirmed any specific bidders.

Borders filed for bankruptcy protection in February, hurt by stiff competition from online booksellers and discounters.

A sale provides the "best path forward to reposition the business for a successful future and to maximize value for the Company's stakeholders," Borders said in a statement.

Under terms of the deal, Borders will become part of the business unit of Phoenix, Ariz.-based Najafi Cos. that also owns Book-of-the-Month Club, Doubleday Book Clubs and Columbia House.

Najafi Cos. bills itself as the largest private equity firm in Arizona with more than $1.1 billion in assets. It has investments in restaurant chain Pasta Pomodoro as well as the Phoenix Suns basketball team, for which CEO Jahm Najafi serves as vice chairman.

Borders had said previously in bankruptcy court filings it was in discussions with several potential bidders. It has said it hoped to name a bidder by July 1 and sell itself by the end of July.

Borders, which started with a single store in 1971, helped pioneer the book superstore concept along with larger rival Barnes & Noble Inc. It was brought down by heightened competition by discounters and online booksellers, as well as the growth in popularity of electronic books. It currently operates about 400 stores, down from its peak in 2003 of 1,249 Borders and Waldenbooks.

Borders stressed in a statement that its Borders Rewards program, gift cards and other customer programs all continue to operate normally.

If Borders doesn't successfully sell itself as a complete company, it is asking the bankruptcy court that its assets be sold by a joint venture led by liquidation firms Hilco and Gordon Brothers. Borders is also asking the court to let the two companies liquidate any stores Najafi doesn't acquire in its bid for the company.

Borders expects the sale process will be complete by late July.

Borders Group Inc. stood on the brink of liquidation after a recent offer for the bookstore chain from a private-equity investor fell apart late Wednesday.

Borders, which employs nearly 11,000 people, designated a group of liquidators as the opening bidders in a looming bankruptcy-court auction amid difficulties getting publishers to relax terms under which they ship merchandise to the U.S.'s second-largest bookstore chain, said people familiar with the matter.

The development raises the prospect that Borders will soon close all its remaining 399 stores and go out of business. No other suitors have so far emerged for Borders ahead of a Sunday bidding deadline.

Borders's deal with the investor, Jahm Najafi, unraveled Wednesday after publishers and landlords owed money from the company complained that his bid would allow him to liquidate the bookstore chain after buying the business.

Mr. Najafi had offered $215 million for Borders, plus an assumption of $220 million in liabilities. The terms allowed him to operate the chain as a going concern or to liquidate the business. A creditors committee said an offer of at least $252 million from a group of liquidators made for a better deal.

Creditors were essentially concerned that Mr. Najafi would pay $215 million in cash for Borders and then liquidate the chain. With that potential scenario lurking, the creditors preferred Borders sell itself to a group of liquidators in a deal they believed would pay them more money ranging between $252 million and $284 million.

They also objected to a $6.5 million break-up fee Mr. Najafi was set to receive if another bidder topped his offer.

Mr. Najafi was willing to drop his liquidation option if publishers agreed to grant him normal trade terms, according to people familiar with the matter.

Some major publishers agreed, but by late Wednesday afternoon a couple hadn't, the people said. At that point, Mr. Najafi signaled he wouldn't alter his terms.

Time was running short, with Borders set to address a bankruptcy judge early Thursday to seek approval of Mr. Najafi's bid and procedures for an auction next week. The bookstore chain pivoted to anointing liquidators as the opening bidders in the auction, set for Tuesday.

In a letter to employees Wednesday, Borders President Mike Edwards said that Mr. Najafi had withdrawn his bid and that liquidators were now circling the company. He told employees he remained hopeful other suitors would emerge to keep Borders in business before next week's auction.

In a statement, Mr. Najafi denied he had withdrawn his bid and said the offer was "no longer supported by the deciding parties." The liquidation bid, his statement said, was "in contrast to what we had envisioned for the future of Borders." Mr. Najafi said he remained willing to move forward with a deal "should the deciding parties instead choose to work with us and our existing offer."

Borders filed for bankruptcy protection in February and has since been bleeding cash and closed more than a third of its stores. Amid mounting losses, the bookstore chain put itself up for sale in a last-ditch attempt to survive.