LeBow overtakes Ackman as Borders' top shareholder

NEW YORK (Reuters) - Financier Bennett LeBow is buying a 15.5 percent stake in Borders Group Inc BGP.N, making him the bookseller's top shareholder ahead of William Ackman, and could command an even greater share of the company through a warrants issue.

LeBow -- who will also join Borders' board and become its chairman -- agreed to buy 11.1 million shares for $2.25 each, the No. 2 U.S. specialty bookstore chain said in a statement. The transaction is expected to close by the end of Friday.

News of the $25 million cash infusion pushed Borders' shares up as much as 8.5 percent. The chain is trying to redefine its business strategy as more readers choose to buy electronic books and as rivals like Barnes & Noble Inc (BKS.N) and Amazon.com Inc (AMZN.O) step up the competition.

Borders is also seeking shareholder approval to issue LeBow warrants to acquire an additional 35.1 million shares at $2.25 apiece.

Ackman, whose Pershing Square Capital Management owns 10.6 million shares, will see his stake fall from 17.7 percent to 14.8 percent of the company after this transaction due to dilution.

But Pershing Square will receive 2.7 million warrants with an exercise price of 65 cents following LeBow's investment, and another 8.6 million if LeBow exercises his warrants.

If both parties exercise all their warrants, LeBow's stake would be 35 percent, and Pershing Square's 31.1 percent.

The investment comes a few weeks before Borders launches its own electronics bookstore to catch up to larger rival Barnes & Noble and online retailer Amazon, which have a large head start in the e-books market.

Borders said it would use LeBow's investment to improve its capital position and bolster its push into the fast-growing electronic books market.

"At this point, the company is in survival mode and taking any bit of liquidity it can," said Michael Souers, a retail analyst at Standard & Poor's Equity Research.

In a note, Souers wrote that "risks remain significant in the book retailing industry, however, with secular trends putting pressure on brick and mortar businesses;" he maintained his "hold" recommendation on the stock.

LEBOW'S PAST IN TOBACCO

In a statement, Borders Chief Executive Mike Edwards said LeBow has "proven experience with driving company turnarounds."

LeBow is the chairman of tobacco holding company Vector Group Ltd (VGR.N) which includes cigarette maker Liggett Group. He will replace Richard McGuire, a former partner at Pershing, as chairman of Borders' board.

Vector Chief Executive Officer Howard Lorber is also joining Borders' board, whose size is being increased to nine members from eight.

LeBow gained notoriety in 1996 when Liggett Group, under his control, broke ranks with other tobacco companies such as Philip Morris Cos Inc to settle smoking lawsuits brought by state attorneys general.

At that point, LeBow and investor Carl Icahn were trying to gain control of Nabisco, spin off its food business and seek a merger between R.J. Reynolds and Liggett.

The investment comes a few weeks after Borders repaid a $42.5 million loan to Pershing Square and secured access to more credit, giving the retailer much-needed breathing room.

Borders has lost market share to Barnes & Noble, and in its most recent quarter, which included the holidays, sales at its namesake superstores open at least a year fell 14 percent. Borders is set to report first-quarter results next Thursday.

Last week, Ackman told Reuters that Borders was still not "out of the woods" and questioned whether there was room for two national specialty bookstore chains in the United States.

Ackman also referred to Pershing as a "stuckholder," hinting he might like to exit the investment.

Ackman did not return a phone call and email requesting comment on whether he planned to shed his stake. Borders said that Pershing Square had indicated support for the investment from LeBow.

(Reporting by Phil Wahba; Editing by Gerald E. McCormick, Dave Zimmerman and Matthew Lewis)