Buying Borders

Well, that didn’t take very long. “Ask and ye shall receive” I guess?

So yesterday I posed some questions about Borders (BGP) and today, answers came piling in.

Bill Ackman’s Pershing Square Capital Management Borders’s largest holder, has entered into the following agreement with Borders.

– A $42.5 million secured term loan to Borders at a 12.5% annual interest rate; the loan matures Jan. 15, 2009.
– Pershing committed to a “backstop purchase offer” that gives Borders the option until Jan. 15, 2009, to sell its Paperchase, Australia, New Zealand and Singapore units and its 17% interest in Borders U.K. to Pershing for $125 million, “after the company has pursued a sale process to maximize the value of those assets.”
– Borders will issue to Pershing 14.7 million warrants to buy shares at $7 each. That would be just under a 20% stake in Borders. The stake would be protected against dilution if Borders were to issue more equity, except shares issued for employee stock options.

The proposal is binding on Pershing Square until April 4. Borders has the right until then to seek better financing deals. If Borders finds a better deal, it can end the Pershing agreement with no break-up fee, although Pershing can request reimbursement of “reasonable expenses”, Borders said.

And oh yea….

The company today also reported results for the fourth fiscal quarter and full year 2007, ended Feb. 2, 2008. As detailed below, on an operating basis, fourth quarter income from continuing operations was $84.7 million or $1.44 per share compared to $87.7 million or $1.45 per share a year ago. Total consolidated sales from continuing operations were $1.3 billion in the fourth quarter. Excluding the impact of the extra week during fiscal 2006, this represents a 2.8% increase over the same period a year ago.

Ok.

After Ackman exercises the warrants, his ownership of the chain will be 40% when you take into consideration his economic interest being held in “total return swaps”. This ownership percentage will effectively give him total control of the chain. This is very good for shareholders.

Let’s not forget, Ackman began buying at $24, doubled down at $12 and now will pick up another chunk at $7.

A key here is the dilution protection. Buying shares here can be done with a reasonable as can be expected assumption of no further dilution. That is important. One could probably assume that Ackman may be buying more now with the stock hovering around $5.50 a share.

Here is why all the above is good news. The equity stake by Ackman in Borders is a non issue because his interest in the chain is the same as mine. He is “eating his own cooking” when it comes to the company as Berkshire’s (BRK.A) Warren Buffett is fond of saying.

Were this an outside equity stake, we could not be sure what the intent of the holder was. The loan that is issued would take priority over the stock price but with the loan holder being Ackman, and he having an interest in 40% of the shares, the stock price will not be ignored.

Yes the dividend was eliminated but let’s be honest, 11 cents a share ain’t gonna buy a summer home. Keep it and get this going.

The question that was not answered was the online store. But, a look at the results there from Barnes and Nobel (BKS) show that there is definitely growth there (13%) apart from Amazon (AMZN).

All that being said, at $5 and change, time to pick it up…

Disclosure (“none” means no position): Long BGP

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