Liquidation Threat for Borders?

When Borders filed for bankruptcy earlier this year, few people expected it to survive long-term, but the chain might be gone faster than most suspected.

Yesterday, Borders' unsecured creditors' committee declined to make Najafi Companies, owner of Book-of-the-Month Club, as Borders' stalking-horse bidder. The creditors were apparently worried that Najafi was going to buy the chain on the cheap and then liquidate it without any benefit to them.

The firm was offering about $215 million for the company, plus assumption of about $220 million in debt.

What's worse, as of today, the only other entity known to have expressed interest in buying Borders has been a partnership between the Gordon Brothers Group and Hilco. Both of those firms specialize in liquidation rather than keeping companies as operating concerns. The rejection of Najafi means that when Borders starts its court-appointed auction on July 19, Gordon Brothers and Hilco will be the preferred bidders.

Below is an outtake from an internal memo sent by Borders president Mike Edwards:

Under the previously announced sale process, Borders had two alternate options for a Stalking Horse bidder: the Najafi proposal, or a group including Hilco and Gordon Brothers, who would purchase the store assets of the business and undertake an orderly wind-down. Late this afternoon, Najafi informed us that they have decided to withdraw as the stalking horse proposal, and therefore we will submit the Hilco and Gordon Brothers proposal to the Court for the purposes of serving as the Stalking Horse bidder at the auction next week.

While we regret Najafi's withdrawal as the Stalking Horse bidder, we remain hopeful that they or other potential bidders who are interested in operating Borders as a going concern will choose to participate in the auction process on July 19.

If Borders liquidates in the next few months, it will deliver a serious blow to power center landlords, who have not yet completely recovered from the bankruptcies of Circuit City and Linens 'n Things two years earlier.

Today, Borders operates 399 stores. Some of those are in great locations and might be snapped up by other retailers. But there are still few tenants in the market looking to take large chunks of space and the liquidation will likely lead to an uptick in loan defaults for some owners.

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