Can Borders Really Survive?

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I would have left Borders (NYSE: BGP  ) for dead a long, long time ago In fact, I wrote off its chances of success way back in autumn 2008. The bookseller has continued to stagger along, though, with a lot of help from a major shareholder. Today, Borders announced yet another development in its ongoing saga.

Financier Bennett LeBow has snapped up a 15.5% stake in the bookseller. As part of the deal, he will become the company's chairman. LeBow's stake provided $25 million in new liquidity to the company, helping to shore up its balance sheet. The dilution diminishes the relative stake of Borders' current top shareholder, Bill Ackman of Pershing Square Capital Management, which will dwindle to 14.8% from 17.7%.

Investors should expect further dilution from the deal, since the company is asking shareholders to allow it to offer LeBow warrants. That would permit LeBow to buy 35.1 million shares of Borders' stock for $2.25 apiece, giving the struggling company nearly $80 million in extra cash. But Ackman is also receiving warrants, and could receive even more if LeBow exercises his.

Regardless of the new cash influx, individual investors should still steer clear of Borders. The bookseller has its work cut out for it, contending with everyone from Barnes & Noble (NYSE: BKS  ) to Wal-Mart (NYSE: WMT  ) , not to mention fierce rivalry in the e-book market from (Nasdaq: AMZN  ) and even Apple (Nasdaq: AAPL  ) . Even though Borders recently launched its own e-reader, it's up against stiff competition.

Long-standing major shareholder Ackman has made some very optimistic statements about Borders' potential to survive. However, just a week ago, he admitted that Borders isn't "out of the woods," acknowledging that two bricks-and-mortar bookstore chains might be one too many. He even referred to Pershing as a "stuckholder." Ouch.

LeBow is a "financier," and while he's touted as being good at turnaround efforts, I'm not sure he'll be up to the difficult task of helping to repair a retailer. He's already chairman of tobacco company Vector Group (NYSE: VGR  ) .

Investors might also want to cast a little skepticism on the idea that financial types yield great retail turnarounds. Sears Holdings (Nasdaq: SHLD  ) Chairman Eddie Lampert had a great reputation as a hedge fund manager, but he's had a hard time reviving Sears and Kmart operations. Sears recently reported a lackluster quarter, complete with plunging profit, and has struggled to remain relevant amid competition from the likes of Wal-Mart.

Is this Borders' big chance, and a huge opportunity for investors? Or is the bookseller a zombie retailer in search of fresh brains? Let us know in the comments box below.

Apple and are Motley Fool Stock Advisor picks. Wal-Mart is an Inside Value recommendation. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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  • Report this Comment On May 21, 2010, at 11:52 PM, EditorJim wrote:

    While this development certainly takes Borders out of the ICU, I still don't see a long term upside. Unless Mr. LeBow has some pull with the leaseholders, the current rent for the stores, locked into high rates for years, means that it would take 10-15% growth per year from now until 2014 for Borders to turn a yearly profit even once before the current financing comes due.

    The problem is that cost cutbacks have slashed staffing WAY below the critical mass needed to hold onto current customers, much less foster any growth. Sales have yet to decline *enough* to reach equilibrium with available customer service. Any promotion or sales initiative is immediately rendered moot by the fact that new customers are made to wait inordinate amounts of time to receive even perfunctory service, much less the kinds of excellent service that used to make Borders special.

    You have 30-50,000 sq ft of retail space crewed by 3 or 4 people tops -- a cashier, a cafe barrista, a bookseller on the floor, and a manager (if they aren't already one of the above). Shrink is going to be horrendous this year, huge amounts of merchandise gets stuck in the back room where it can't be found or sold, and finding books that reach the floor becomes nearly impossible because the shelves can't be kept organized.

    And while the Kobo E-reader any other electronic initiatives are necessary, and the overall strategy is sound in this area, it is NOT a source of overall growth, but merely a backstop to recapture just *some* of the lost sales on the physical side of the book business. Borders will simply fall behind in market share in this category as well.

    To put things in perspective, a back-of-envelope calculation shows that to increase staffing by 1 person for each hour each store is open per year would cost around $20M. It would take at least 3 extra people to finally stop the bleeding on comp sales from the past three years. ALL of the potential money injected into the corporation by Mr. LeBow is barely sufficient to even begin addressing not only this, but a rickety IT/inventory infrastructure, worn out and obsolete store fixtures, and just a plain lack of vision for what Borders needs to be to not just survive, but to thrive once again become a force in the industry.

  • Report this Comment On May 22, 2010, at 2:25 PM, running01 wrote:

    I worked for Borders for many years. In the end, I witnessed a company that is clearly destined to fail. They fired, in the worst manner, most long-termed GM's and DM's. They treat their employees with threats and raises don't come to these minimum wage workers-in three years. They are forced to sell make-titles and if they don't, they are treated worse. To say, that most employees are hoping this company fails, doesn't really say it.

    How this company treats it's staff is the worse around. I know I am not alone in this statement. They are crooks and know how to make money with their stock. I hope Barnes and Nobles rubs their face in sales.

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