Why Did Borders Stock Fall? "Alternative Financing Transaction"

Three little words have cast doubt on the retailer that otherwise is doing everything it said it would.

In reviewing the last earnings call Borders (BGP) has made significant progress this year on all stated goals..

* Debt down over 30%
* Cash flow from negative $100m to plus $9 million
* Cost cuts surpassed the $120 million goal to $140 million now
* The new concept stores have exceed expectations
* Borders.com has over 30 million Rewards Members and adds over 120k a week.

Here is the problem:
“Regarding Paperchase we retained the right to exercise the put option to sell Paperchase to Pershing Square Capital Management for $65 million and we are also in discussions with Pershing Square regarding an alternative financing transaction.

Of course no assurance can be given as to whether an alternative financing transaction will be entered into or contemplated.”

Later, in response to a question, CEO Jones says:
Matthew Fassler – Goldman Sachs:
“Related to the other deal you’re looking at with Pershing you talked about retaining the put on Paperchase but you said you’re looking at an alternative strategic transaction to the extent and if you’re free to shed any light on what kind of transaction that might be we’d be interested.”

Edward Wilhelm
“We do have, we have retained the rights to the put, and the disclosure in the release was an alternative financing transaction. And we can’t comment any further then what was in the release.”

Matthew Fassler – Goldman Sachs
“Would that be presumably a more comprehensive transaction that goes beyond Paperchase?”

Edward Wilhelm
“We really can’t comment any further.”

George Jones
“The key thing to note though is we still have the right to the put so anything we do is obviously going to be favorable for the company.”

The lack of any further clarity leaves people wondering. Now, of course folks think the deal will be favorable to the company. But, does it mean it will stop it from Chapter 11 or does it mean it will provide additional liquidity to increase concept store openings? Does it mean credit markets are closed to the retailer or does it mean thy can just get a better deal from Pershing? Does it mean Ackman may just buy the rest of the company for the $25 million it will cost him at these prices and just spin it out in a few years and they want to avoid that?

You could go one for another 20 scenario’s and until Borders or Ackman come out and settle folks down, the stock will languish. Do I think the company is in trouble? No. But, I have no ammunition to make the argument when they give us nothing.

I know some folks who have spoken the Wilhelm as essentially said the same things and the reply was that they “understood but could not announce specifics now”. We do not need specifics…just a direction..

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