* Borders planning more meetings next week-source
* Most publishers have stopped shipping books-source
By Tom Hals and Jennifer Saba
WILMINGTON, Del./NEW YORK, Jan 5 (Reuters) - Bookseller Borders Group Inc BGP.N is floating the idea of treating the money it owes publishers as a loan, a way for the company to rework its finances, a publishing source said.
Borders, the second-largest U.S. bookstore chain, which last week said it was delaying payments to some vendors, began meetings with publishing houses on Tuesday and has planned more meetings for next week, said the source.
Borders, whose sales have plummeted in the past three years, warned investors last month that it could face a cash shortfall early this year.
“The idea is that what they owe is considered a loan that they would pay back with interest,” said the source, who requested anonymity because the business relationship with Borders is confidential.
A Borders spokeswoman, Mary Davis, declined to discuss the details of those meetings and said on Wednesday that the company is not experiencing a liquidity crisis.
The meetings could determine the bookseller’s fate, with publishers playing a role usually reserved for lenders or bondholders of distressed companies.
“If they find vendors are not supporting them they can’t survive,” said David Berliner, who specializes in retail turnarounds with BDO Consulting.
The mutual dependence of Borders and publishers will probably push the two sides closer and head off drastic measures, such as vendors trying to force an involuntary bankruptcy or Borders refusing any payment on past due bills, according to bankruptcy specialists.
Borders has not missed a bond or loan payment, but it has stopped payments to some suppliers to preserve its cash.
Borders’s biggest liability is not the money it owes to its banks and investors, but to the publishers that fill its shelves with best-sellers.
Some publishers have stopped sending more books to the company, industry insiders said.
“Publishers are sitting by and waiting and they are not shipping any more books into Borders because they are waiting to see how it all falls out,” said Robert Gottlieb, chairman of Trident Media Group, a literary agency.
As of Oct. 30, Borders Group had $23.1 million in cash on hand, but its trade accounts payable, or money owed to vendors, was $444.9 million. It also had merchandise inventories of $895.8 million.
Earlier this week, Borders said stores were well stocked. The negotiations with publishers come at the slowest time of year for book sales, potentially giving Borders more leverage than it would have had before the holidays.
Borders would likely want to convert amounts owed immediately to longer-term notes, giving the company time to put the business on a more stable footing, said Michael Epstein, a partner with turnaround consultant CRG Partners.
Turnaround experts said Borders may also use the meetings with suppliers to discuss “critical vendor” status.
In the event of bankruptcy, that designation would allow suppliers to get some money for bills unpaid before the bankruptcy filing.
Typically to get such status, suppliers would agree to continue to supply a company after it emerged from bankruptcy and to extend credit.
In the case of Borders, vendors would also have to balance their relations with Borders against their relations with other booksellers, which might demand similar terms. Barnes & Noble Inc (BKS.N), the largest U.S. bookstore chain, already said this week that it expects a level playing field.
Borders’s woes could help Barnes & Noble, which is also facing sales declines as readers shift to digital formats. But Borders, unlike its larger rival, does not have a sizable share of the growing e-books market. [ID:nN05266019] [ID:nN25277276]
Borders last March repaid $42.5 million to activist investor William Ackman’s New York-based hedge fund Pershing Square Capital Management. It had borrowed the money to upgrade technology and remodel stores.
Borders then entered into an amended $700 million revolving credit agreement that matures in March 2014, replacing an earlier agreement that was to mature in July 2011, and closed on a $90 million term loan credit facility.
But in December, Borders said disappointing sales -- sales at superstores open at least a year fell 12.6 percent last quarter -- had affected its borrowing capacity.
Last month, Ackman proposed to finance a takeover of Barnes & Noble by Borders for $16 per share, but analysts dismissed the idea, citing the chains’ store overlap and the near absence of Borders in the e-books market. Barnes & Noble shares were trading at $15.98 on Wednesday afternoon.
Ackman first bought shares in 2006 for $23.92 saying they were undervalued. Two years later they were down to 35 cents.
Borders shares were trading at 85 cents on Wednesday. They are down 74 percent from their 52-week high last April. (Additional reporting by Phil Wahba in New York; Editing by Steve Orlofsky)