NEW YORK/ATLANTA (Reuters) - Book retailer Borders Group Inc BGP.N on Thursday suspended its quarterly dividend and said it may sell itself, sending its shares down as much as 44 percent to a new low.
No. 1 bookseller Barnes & Noble Inc (BKS.N), seen as a possible acquirer of Borders, reported lower earnings but raised its dividend, and its shares rose 8 percent.
Borders said its largest shareholder, Pershing Square Capital Management, agreed to loan it $42.5 million, and will receive options to buy a 19.99 percent stake in the company at $7 a share.
Without the financing, Borders may have faced liquidity issues, it said.
"Borders effectively announced this morning that they are out of cash and took a stopgap funding" from Pershing, Credit Suisse analyst Gary Balter said in a research note.
While some analysts raised the possibility of a deal with Barnes & Noble, the company said on Thursday it had not been approached by Borders' investment bankers, but would review a possible acquisition if it were contacted.
Borders shares sank as much as 44 percent to touch their lowest price ever and ended the day down more than 28 percent. Barnes & Noble rose as much as 10 percent.
Any combination of the two U.S. booksellers would normally invite tough antitrust scrutiny. But antitrust law allows for an exception in the case of a failing company.
"We believe that Borders' financial distress diminishes the impact of antitrust considerations, though we presume that Barnes & Noble remains averse to taking on leases that would increase store overlap," Goldman Sachs analyst Matthew Fassler said in a research note.
Fassler added that a Barnes & Noble-Borders merger would be "substantially accretive" at any price in the teens.
Under its financing agreement, Borders also has the right but not the obligation to require Pershing Square, which is headed by William Ackman, to buy some of its units in Australia, New Zealand, Singapore and the United Kingdom for $125 million.
Borders, which has been closing underperforming stores and taking other steps to turn around business, said the funding urgency arose as it wanted to reassure creditors and vendors who might cut off business.
It said the credit crisis roiling financial markets had limited its financing options.
"In the environment we're in right now, we have to be really, really prudent," Borders Chief Executive George Jones said during a conference call.
Booksellers, like many other retailers, have come under pressure as rising gasoline and food prices take more of consumers' discretionary income and economic concerns lead many to curb spending.
"We're in a retail recession of tremendous proportion, and people are buying what they have to buy as opposed to what they want to buy," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consulting firm.
"This is not a great time to be in the book business and it's particularly not a great time to be a company like Borders, which may or may not be able to survive," Davidowitz added.
Borders reported net profit of $64.7 million, or $1.10 a share, for the fourth quarter ended February 2, compared with a year-earlier loss of $73.6 million, or $1.25 per share, that included large charges for closing Waldenbooks stores.
Excluding nonoperating charges and discontinued operations, earnings were $1.44 a share, above the $1.42 per share analysts had expected, according to Reuters Estimates.
Revenue fell to $1.35 billion from $1.37 billion, but Borders said sales were up 2.8 percent after excluding the impact of an extra week in the year-earlier period.
At Barnes & Noble, fourth-quarter net income came to $115 million, or $1.79 a diluted share, down 9 percent from $126.7 million, or $1.83 a share, a year earlier.
Excluding benefits from property insurance and litigation settlements, Barnes & Noble earnings were $1.69 a share, compared with the $1.70 analysts had expected, according to Reuters Estimates.
Consolidated sales at Barnes & Noble fell about 2 percent from a year earlier to $1.85 billion. Barnes & Noble's year-earlier period also included an extra week.
Barnes & Noble said its board raised its quarterly dividend to 25 cents a share from 15 cents a share, beginning with the June payout.
Borders said it could pursue alternative financing and terminate its agreement with Pershing should it find more favorable financing options before April 4.
Borders shares lost $2.03, or 28.6 percent, to close at $5.07 on the New York Stock Exchange, after falling as low as $3.97. Barnes & Noble shares climbed $2.27, or 8.1 percent, to close at $30.27 after rising as high as $30.99 in the session, also on the NYSE.
Additional reporting by Diane Bartz in Washington; Editing by Gary Hill