UPDATE: Borders files bankruptcy, to close 2 area stores

Borders Group Inc., the No. 2 U.S. bookstore chain, filed for bankruptcy in New York on Wednesday morning after management changes, job cuts and debt restructuring failed to make up for sagging book sales in the face of competition from Amazon.com Inc. and Wal-Mart Stores Inc.

Borders will shut about 30 percent of “underperforming” stores and restructure using $505 million in so-called debtor-in- possession financing from lenders led by GE Capital, according to a statement. The 40-year-old chain listed debt of $1.29 billion and assets of $1.28 billion as of Christmas 2010 in its Chapter 11 petition filed today in U.S. Bankruptcy Court in Manhattan. The company plans to restructure and continue to operate.

Borders said Monday morning that it will close its downtown-Indianapolis and Carmel stores. Five other stores in the Indianapolis area are not on the closure list: Castleton, River Crossing, Indianapolis International Airport, Greenwood and Noblesville.

The company began looking for a replacement tenant for its high-profile downtown store at the corner of Washington and Pennsylvania streets about two years ago. The 22,000-square-foot space could be split up to accommodate new tenants.

Borders Group's reorganization is only possible if the company immediately closes 200 of its 642 stores, according to an emergency motion to sell furniture and merchandise filed in Manhattan bankruptcy court Wednesday. Sales need to start no later than Feb. 19 to take advantage of the President’s Day long weekend, and another 75 stores may need to close if concessions aren’t won from landlords, the company said.

“Closing the stores right away is essential because the Debtors are losing approximately $2 million per week at the closing stores,” lawyers for Borders wrote in court pleadings.

“Borders Group does not have the capital resources it needs to be a viable competitor,” the company’s president, Mike Edwards, said in a statement. The filing will give it “time to reorganize in order to reposition itself to be a successful business for the long term.”

Borders, whose market value shrunk by more than $3 billion since 1998, racked up losses by failing to adapt to shifts in how consumers shop. Its first e-commerce site debuted in 2008, more than a decade after Amazon.com revolutionized publishing with online sales. The world’s largest online retailer beat it again by moving into digital books with the Kindle e-reader in 2007, a market Borders entered in July.

“Instead of leading and being innovative, they were certainly a follower,” said Michael Souers, an analyst for Standard & Poor’s in New York.

Borders, based in Ann Arbor, Mich., began looking for a cash infusion in December after disclosing lenders cut its borrowing capacity, and that a failure to find replacement credit could lead to a violation of its loan agreements and a “liquidity shortfall” in the first quarter of 2011.

The company has 639 stores under the Borders, Waldenbooks, Borders Express and Borders Outlet names in the U.S. and three in Puerto Rico, according to the court filing. The company has 6,100 full-time workers and 11,400 part-time employees, it said.

Penguin Putnam was listed as the largest unsecured creditor with a $41 million claim. Hachette Book Group has a claim of $36.9 million and Simon & Schuster Inc. has a claim of $33.8 million. Random House, the publisher owned by Bertelsmann AG, Europe’s biggest media company, has a claim of $33.5 million.

The company in May raised $25 million in a private sale to an entity controlled by Bennet S. LeBow, who was then named CEO and chairman. Pershing Square Capital Management LP is Borders’s largest shareholder, according to the filing. Borders’ biggest shareholders also include Zurich-based UBS AG, according to the court filing. It is typical in Chapter 11 bankruptcy for equity holders to receive no return.

Borders estimated that funds would be available for distribution to unsecured creditors, according to the filing signed by the company’s chief financial officer, Scott Henry.

Kasowitz, Benson, Torres & Friedman LLP is the law firm that filed the petition.

Borders has struggled with cash levels since at least 2008, when it ran short of money and was forced to borrow from Pershing, its largest shareholder at the time. After missing a deadline to find a buyer, the company issued 5.15 million warrants to Pershing Square, the hedge fund run by William Ackman, making the fund the bookseller’s largest investor.

Borders borrowed $42.5 million from Pershing to remodel stores and upgrade technology to compete with Barnes & Noble Inc., the largest bookseller in the U.S., and Amazon.com. Cost- savings measures have been implemented over the past year.

In January 2010, Borders announced it would close some of its 513 bookstores in the U.S. and cut 11 percent of staff at its headquarters and eliminate 76 other jobs. CEO Ron Marshall resigned after a year on the job. Michael Edwards was put in a role as interim CEO.

Borders delayed payments to publishers in December as part of a plan to restructure financing arrangements with vendors. The stock lost more than a fifth of its market value, its biggest drop in two years, after the announcement.

Kmart Corp. acquired Borders in 1992, then a chain of about 20 stores founded by Tom and Louis Borders, for about $190 million and combined the retailer with its Waldenbooks unit.

In 1995, Kmart renamed the unit Borders Group Inc. and spun it off in an initial public offering. The new public company, with a market value of about $500 million, had more than 1,000 locations under the Borders, Waldenbooks and Planet Music brands and generated $1.5 billion in revenue.

Borders then dotted the U.S. with book superstores that proved to be more profitable than its mall-based Waldenbooks locations. The superstore unit grew to 200 by 1996, doubled by 2002 and peaked at more than 560.

“They over-expanded and built up some debt on their balance sheet,” said Souers, who has covered Borders for six years. “There was also less control to those businesses.”