Borders Group (BGP)

Pershing owns 10.6 million or 18% of outstanding shares, and David 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)(subscription only). As on March 23rd 2008, Bill Ackman's Pershing Square Capital Management, Borders's largest holder, has entered into the following agreement with Borders.

• A $42.5 million secured term loan to Borders at a 12.5% annual interest rate; the loan matures January 15, 2009.
• Pershing committed to a "backstop purchase offer" that gives Borders the option until January 15, 2009, to sell its Paperchase, Australia, New Zealand and Singapore units, and its 17% interest in Borders U.K. to Pershing for $125 million, "after the company has pursued a sale process to maximize the value of those assets."
• Borders will issue to Pershing 14.7 million warrants to buy shares at $7 each. That would be just under a 20% stake in Borders. The stake would be protected against dilution if Borders were to issue more equity, except for shares issued for employee stock options.

The proposal is binding on Pershing Square until April 4 2008. Borders has the right until then to seek better financing deals. If Borders finds a better deal, it can end the Pershing agreement with no break-up fee, although Pershing can request reimbursement of "reasonable expenses," Borders said.

That’s quite a list of value investors and turnaround specialists who combined own about one-third of Border’s outstanding shares. Furthermore, these holdings are as of the beginning of the year - before yesterday’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.

More importantly, After Ackman exercises the warrants, his ownership of the chain will be 40% when you take into consideration his economic interest being held in "total return swaps." This ownership percentage will effectively give him total control of the chain. This is very good for shareholders. Let's not forget, Ackman began buying at $24, doubled down at $12 and now will pick up another chunk at $7. A key here is the dilution protection. Buying shares here can be done with as reasonable as can be expected assumption of no further dilution. That is important. One could probably assume that Ackman may be buying more now with the stock hovering around $5.50 a share. Overall, the possibility of a sale and the presence of these well-respected and highly successful value investors piques interest.

Some information from the just-released Borders (BGP) 10-K.

• Achieved average sales per square foot of $228 and average sales per superstore of $5.6 million.
• International superstores, which operate under the Borders name, achieved average sales per square foot of $381 and average sales per superstore of $8.3 million in 2007.
• Waldenbooks Specialty Retail operates stores under the Waldenbooks, Borders Express and Borders Outlet names, as well as Borders-branded airport stores. Average sales per square foot were $277 and average sales per store were $1.1 million for 2007
• Borders leases all of its stores. Borders store leases generally have an average initial term of 15 to 20 years with multiple three- to five-year renewal options. At February 2, 2008, the average unexpired term under Borders existing store leases in the United States was 9.8 years prior to the exercise of any options. The expiration of Borders leases for stores open at February 2, 2008 are as follows:
• Waldenbooks Specialty Retail store leases generally have an initial term of five to 10 years, and in certain cases posses renewal terms of one to three years. At present, the average unexpired term under Waldenbooks Specialty Retail existing store leases is approximately 1.7 years.
• Borders has $92.2 million remaining on a share repurchase authorization but cannot repurchase them if borrowings under credit agreement exceed 90%.
• Borders Rewards has grown to over 25 million members.

Again, nothing earth shattering which is a nice disclosure sign.^[1]

1. ↑ ValuePlays Research