NEW YORK, July 1 - Borders Group Inc’s BGPIQ.PK preliminary or “stalking-horse” agreement to sell itself to private investment firm Najafi Companies could signal its shift toward digital operations.
The $215 million deal, announced in court papers filed late Thursday, would make Borders a subsidiary of Direct Brands, a media distribution firm owned by Najafi. The buyers would assume $220 million of Borders’ liabilities on top of the purchase price, according to the filing.
The sale to Direct Brands, an online- and catalog-based supplier of DVDs, CDs and books, could foreshadow the company’s move away from the superstore retail model, said bankruptcy attorney Richard Bendix, who is not involved in the case.
“The free-standing store seems to be on its way out as a business model because it’s cheaper to go online, either to buy the physical book online or buy the book digitally,” said Bendix, of law firm Dykema Gossett.
Borders President Mike Edwards voiced confidence about the company’s viability, saying in a statement he considers the Najafi/Direct Brands deal a step toward “a vibrant future and sustainable earnings growth.”
Borders recently has tried to focus on boosting its digital business, partnering with Toronto-based Kobo Inc, maker of the Kobo eReader and eReader Touch. That product competes with the more popular Amazon.com Inc (AMZN.O) Kindle and Barnes & Noble Inc BKS.N Nook.
The company appears to be trying to increase its presence in the digital market, but they may be a little late to be a dominant player even under new ownership, said Kenneth Dalto, owner of turnaround consulting firm Ken Dalto & Associates.
“If they really do their jobs right I think they can be a boutique player, but they’re years behind,” Dalto said.
Borders declined to comment when contacted by Reuters on Friday.
Najafi and Direct Brands did not respond to requests for comment.
Borders filed for bankruptcy in February after years of falling sales that made it impossible to manage its debt load. It has scheduled an auction for its assets July 19, and hopes to close any ultimate deal by the end of July.
Stalking-horse bidders agree to acquire firms at a minimum price if other parties do not offer better bids at auction. The Najafi/Direct Brands bidders are entitled to a $6.45 million breakup fee if outbid by competitors, according to court papers.
While Borders hopes to sell itself as a going concern, at least partial liquidation is likely, Dalto said.
“The buyer is going to cherry-pick the assets it sees as valuable, which means they’ll get rid of more stores, cut more costs with abandon, and get rid of overhead,” he said. “They’re really buying the distribution network but they don’t want brick-and-mortar.”
Borders has reached a deal with a group of liquidators to close any stores not ultimately bought at auction, and would under the terms of its bankruptcy loan have to liquidate if its sale plan fell apart for any reason.
It is also possible that liquidators could outbid potential buyers at auction and win the right to liquidate the chain altogether, said bankruptcy attorney Jay Indyke, of Cooley LLP.
Bankrupt companies are obligated to accept the best deal for creditors, so if liquidators offered the clear-cut highest price, they could beat out a buyer willing to keep the company in business, said Indyke, who is not involved in the case.
But a liquidation bid might have to be significantly above competitors’ offers to overcome a buyer willing to keep the business going.
“If the bids were close and not significantly different, the debtor or the judge could decide the best bid, even if it’s not the highest bid, is the one that’s going to keep jobs and keep stores open,” Indyke said.
Najafi had been competing with fellow private equity firm Gores Group to serve as Borders’ stalking-horse bidder. Najafi won in part because of its ties to the literary and publishing world, Dalto said.
The Phoenix, Arizona-based Najafi in 2008 acquired Direct Brands, the Book-of-the-Month Club, the Doubleday Book Club and Columbia House.
The case is In re Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-10614.
Reporting by Nick Brown; Editing by Gary Hill