CHICAGO (Reuters) - Borders Group Inc BGP.N, which is considering selling itself, said on Monday it reached a revised financing agreement with its largest shareholder to allow for more time to implement new strategies, sending its shares up more than 12 percent.
The No. 2 specialty book seller, which has been closing underperforming stores and taking other steps to turn around its business, said the new deal with Pershing Square Capital Management is more favorable than the one it replaces. It had previously said without new financing, it might have faced liquidity issues.
"The new terms of the agreement are much more favorable for (Borders)," Standard & Poor's analyst Michael Souers said in a research note. "We expect continued challenging business conditions to limit (Border's) near-term earnings and cash flow, but think improved terms ease debt burden somewhat."
Booksellers, like many other retailers, have been pressured as rising gasoline and food prices take more of consumers' discretionary income.
Borders said earlier this month it was discussing alternative financing proposals with several parties and would delay filing its annual report.
Goldman Sachs analyst Matthew Fassler, who has a "neutral" rating on the stock, said in a research note the announcement suggested Borders had likely received competing financing offers that Pershing Square chose to match. He added the new agreement should not affect Borders' efforts to sell itself within the context of exploring strategic alternatives.
The Ann Arbor, Michigan-based company said on March 20 -- when it announced the previous agreement with Pershing Square -- that it was suspending its quarterly dividend and exploring a possible sale, sending its shares down as much as 44 percent at the time. In the past, analysts have raised the possibility of a deal with larger rival Barnes & Noble Inc (BKS.N).
The new agreement with Pershing Square, which is led by William Ackman, offers Borders a lower interest rate of 9.8 percent on its $42.5 million loan, down from 12.5 percent before, the company said.
"We are pleased to have reached a final financing agreement with Pershing Square that includes more advantageous terms and still provides Borders with the necessary funding to continue implementing our key initiatives," Borders Chief Executive George Jones said in a statement.
"Borders is now turning its focus to the broader strategic alternatives process."
The new deal also includes an increased backstop purchase offer of $135 million for international subsidiaries -- up from $125 million -- and a reduction in the number and term of warrants issued to Pershing Square.
The new financing commitment includes 9.55 million warrants to purchase Borders stock at $7 apiece for Pershing Square, down from 14.7 million in the previous agreement.
Also under the new deal, Pershing Square will receive an additional 5.15 million warrants if a definitive agreement relating to a change in control of the retailer is not signed by October 1 or Borders ends its strategic alternative process.
J. P. Morgan Securities Inc and Merrill Lynch & Co acted as financial advisers to Borders in the evaluation of its financing alternatives and Merrill Lynch provided a fairness opinion to the board of directors regarding the financing.
Borders shares rose as high as $6.94 and were still up 53 cents, or 8.6 percent, at $6.70 in afternoon trading on the New York Stock Exchange.
Reporting by Martinne Geller and Ben Klayman, editing by Maureen Bavdek/Andre Grenon