Borders hires bankers for possible sale

Retailer cuts dividend as Q4 profit trails expectations

By Danny King -- Video Business, 3/20/2008

MARCH 20 | Borders Group said early this morning that it hired investment bankers to explore a possible sale of the company. Borders also said its fiscal fourth-quarter profit lagged analyst expectations on lower gross margins from holiday discounts. The company’s shares plunged to their lowest price in more than a decade after it suspended its dividend program.

The company, which trails only Barnes & Noble among U.S. bookstore chains, said it hired J.P. Morgan and Merrill Lynch to assess strategic alternatives, including a possible sale. Borders also received a $42.5 million loan from Pershing Square Capital Management, which may acquire some of Borders’ overseas units.

Borders had earnings of $64.7 million, or $1.10 a share for the quarter ended Feb. 2, compared with a loss of $73.6 million, or $1.22 a share, a year earlier, when it took write-downs on its U.K. operations and Waldenbooks chain. Profit trailed the $1.42 per share average analyst estimate in a Thomson Financial survey, as gross margins fell on worse than expected performance of DVD sales and café operations. Fourth-quarter sales fell 2% to $1.35 billion.

The company's stock dropped to its lowest price in more than a decade, declining more than 25% this morning.

Borders is among specialty retailers that have struggled as general merchandisers such as Wal-Mart and online retailers such as Amazon.com have taken books and music market share. U.S. sales of DVDs and compact discs have stalled as the economy softened and customers downloaded more music instead of buying it in stores. Borders’ gross margins fell as it discounted books to maintain sales during the holiday season.

“If you let off the promotional pedal, you’re going to get hit on the sales,” Borders CEO George Jones said on a conference call with analysts this morning. “People have said they’ve never seen it as competitive as it was this year. I do not see that easing off this year.”

The Pershing agreement includes an option to buy Borders’ overseas businesses for $125 million. Borders appointed Pershing partner Richard “Mick” McGuire to its board in January. Still, the company brought in J.P. Morgan and Merrill Lynch to look at other plans, including selling the company.

“We believe the plan we’re operating is the right plan, but starting immediately, we’re working with our advisors to explore any and all alternatives that may be more beneficial to shareholders,” Borders chief financial officer Edward Wilhelm said on the call this morning.

Competitor Barnes & Noble said this morning that fourth-quarter profit beat analyst expectations and that it was boosting its dividend.