Borders Shares Crushed As It Explores Strategic Options And Receives Special Financing

Borders Group (BGP), the bookstore chain, reported earnings before the open this morning.  In addition, they announced that they have retained JP Morgan and Merrill Lynch to explore strategic alternatives and have arranged a special $42.5 million financing arrangement with their largest investor, Dan Ackman’s Pershing Square Capital, a prominent activist hedge fund (BGP 4Q Earnings Release).

Shares had already lost 2/3 of their value over the last year heading into today’s trading and are getting torched today as well, down 40% to around $4.30 on huge volume (BGP 1 Year Chart).

The stock is interesting to me here.  The company is struggling due to competition from online booksellers like Amazon and Barnes & Noble, a hefty debt load, a general cultural trend away from reading books and the tough macroeconomic environment. 

But two prominent value investors are its largest shareholders: Pershing owns 10.6 million or 18% of outstanding shares and David Dreman Dreman’s Value Management owns 4.8 million or 8% of outstanding shares.  Citadel Investment Group also owns 3.2 million or 5.4% of outstanding shares (WSJ BGP Institutional Holdings). 

That’s quite a list of value investors and turnaround specialists who combined own about 1/3 of Border’s outstanding shares.  Further, these holdings are as of the beginning of the year – before today’s 40% haircut.

Fundamentally, the company isn’t making any money and it has a lot of debt: about $500 million net.  On the other hand, same store sales have stabilized and been positive for three straight quarters.

All in all, the possibility of a sale and the presence of these well respected and highly successful value investors piques my interest.  I think its worth nibbling at here as its hard to imagine things getting any worse and their could be some upside.

Disclosure: Top Gun is long shares of Border’s Group (BGP).