Borders Group Inc. has only five more days to announce a deal to sell itself before it must give its largest investor a large block of warrants that could further bolster his control of the nation's second-largest book retailer by sales.Under the terms of a deal struck earlier this year, the Ann Arbor, Mich., company will have to grant Pershing Square Capital Management LP 5.15 million warrants to purchase company common stock at $7 per share on Oct. 1 unless it strikes a deal to sell itself before that date. The warrants have a term life of 6.5 years, according to public filings.
Borders will also have to issue those warrants if, at anytime, it takes itself off the market, or if it sells its U.K.-based Paperchase stationery business to Pershing Square, which is headed by activist investor William Ackman. The bookstore chain's right to force such a sale for a price estimated at $65 million ends Jan. 15. Borders could sell Paperchase to a third party at anytime, or decide to allow the option to expire.
There are 60.5 million Borders shares outstanding on a fully diluted basis. If Mr. Ackman exercises the 5.15 million warrants, it will dilute existing shares by 7.8%.
As of 4 p.m. composite trading on the New York Stock Exchange Thursday, Borders was at $7.07, up 16 cents. A spokeswoman for Borders declined to comment on the continuing process to sell the chain.
Given that shares of Borders are trading close to the exercise price of the warrants, Mr. Ackman is likely to wait to redeem them until the shares are well above their current level. If Borders misses the deadline to complete a deal and issues the warrants, Mr. Ackman stands to benefit even more from a sale and may begin to exert pressure on Borders to secure a transaction quickly.
Borders had hoped to have a deal in place by the end of the month, but the market turmoil and growing uncertainty about the retail sector have all but dashed those hopes, according to one person close to the company.
Last March, Borders surprised Wall Street by putting itself up for sale and revealing a possible cash crunch. The retailer struck a deal with Mr. Ackman that called for him to lend it $42.5 million and purchase most of its foreign assets if Borders was unable to sell them. Terms called for Borders to pay him 9.8% interest on his senior secured loan and for the money to be repaid by Jan. 15. Most of Borders's foreign assets have subsequently been sold.
As of April 9, Mr. Ackman controlled 20.1 million shares of common stock, representing 28.8% of all shares outstanding. This includes 9,550,550 warrants (at a strike price of $7) that he already received in return for providing the Borders financing package. In addition, he controls equity swaps representing 4.8 million shares, bringing his total ownership stake to 35.6% of common stock, according to Securities and Exchange Commission filing.
If he executes the additional 5.15 million warrants that he may gain on Oct. 1, it could bring his ownership stake to more than 30 million shares. Mr. Ackman declined to discuss his investment. He is also the second-largest investor in Barnes & Noble Inc., the largest U.S. bookstore chain, with holdings of 6.5 million shares, or 11.6% of common.
By: Jeffrey Trachtenberg
Wall Street Journal; September 26, 2008
