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Borders Bankruptcy May Snuff Ackman’s Merger Ambitions

Pershing Square Capital Management Founder William Ackman
Founder of hedge-fund firm Pershing Square Capital Management LP William Ackman. Photographer: Jin Lee/Bloomberg

Feb. 17 (Bloomberg) -- William Ackman, whose stake in Borders Group Inc. will probably be wiped out by bankruptcy, also may be thwarted in his ambition to wed the bookstore chain to larger Barnes & Noble Inc., analysts say.

The founder of hedge-fund firm Pershing Square Capital Management LP sought in December to help Borders fund a purchase of Barnes & Noble. Borders filed for bankruptcy yesterday in New York after four years of sales declines, and now plans to shut about 40 percent of its superstores in the next several weeks.

Barnes & Noble probably will avoid a Borders purchase because the chain doesn’t have an appealing digital reading business or much attractive real estate, said Peter Wahlstrom, an analyst for Morningstar Investment Services in Chicago. Instead, Barnes & Noble may seek a chunk of the more than $500 million in sales Borders’s collapse will free up.

“Barnes & Noble hasn’t expressed an interest to expand their number of stores,” Wahlstrom said. The company needs to focus on digital reading because “if you take your eye off the growth ball, you risk exposing yourself to the same kind of fate as Borders.” Barnes & Noble itself is shutting stores, cutting the count by 10 percent over the last four years.

Pershing owns about 31.3 percent of Borders’s publicly traded equity interests, according to a court petition filed yesterday.

Pershing’s Stake

Pershing bought 5.1 million shares of Borders in the third quarter of 2006 when the stock traded between $18 and $20. The value of Pershing’s stake in common stock peaked at $173.3 million in March 2007 and the holdings increased to 10.6 million by the end of 2007.

Ackman, 44, didn’t respond to a request for comment. Mary Ellen Keating, a spokeswoman for Barnes & Noble, and Mary Davis, a spokeswoman for Ann Arbor, Michigan-based Borders, declined to comment.

Barnes & Noble, based in New York, rose 7 cents to $18.84 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have surged 24 percent since Dec. 9, when Borders said it planned to refinance its debt and might face a liquidity shortfall.

This month, Ackman said Pershing lost $125 million on its investment in Borders. The retailer, whose market value has shrunk by more than $3 billion since 1998, racked up losses by failing to adapt as consumers switched to digital readers.

Borders Sale

Borders put itself up for sale in March 2008 and speculation mounted that Barnes & Noble would buy it. Pershing owned shares of both companies at the time. Borders ended the process in November of that year without finding a bidder, and Pershing sold its Barnes & Noble stake in December 2008.

Ackman also approached Leonard Riggio, founder and chairman of Barnes & Noble, and Ronald Burkle, a large Barnes & Noble investor, about combining the companies, according to court documents and testimony from a lawsuit last year. Riggio declined to pursue a deal for Borders because he didn’t want any more exposure to retail space, court documents showed.

On Dec. 6, Pershing offered to help Borders fund an all-cash acquisition of Barnes & Noble for $16 a share, valuing the chain at about $960 million. At the time, Barnes & Noble declined to respond.

Now Borders’s bankruptcy could put $550 million in revenue up for grabs, Gary Balter, an analyst for Credit Suisse, wrote yesterday in a note to clients. The closings may increase sales at Barnes & Noble superstores 6 percent, said Balter, who has a “neutral” rating on Barnes & Noble shares.

Digital Books

Those sales also could go online instead. The emergence of digital books, which account for about 10 percent of U.S. book sales, has led to competition from Apple Inc. and Sony Corp. Online bookseller Inc. has only bolstered its lead in the market with its best-selling Kindle digital reader, introduced in 2007.

Although the impact of Borders’s bankruptcy won’t be as great on Barnes & Noble as it would have been five years ago, “the majority of book sales are still physical books,” Michael Souers, an analyst at Standard & Poor’s in New York, said in an interview. “Overall, it’s a benefit for Barnes & Noble.”

Both book chains have posted annual declines in sales at stores open at least a year, a key indicator of growth because new and closed stores are excluded. In the quarter ended Oct. 30, Barnes & Noble’s same-store sales fell 3.3 percent and Borders’s dropped 12.6 percent.

The Nook marks one of the differences between the chains. While Barnes & Noble invested in its own e-reader and e-book library to compete with Amazon’s Kindle, Borders decided to sell a handful of devices from manufacturers such as Sony in its stores and partnered with Kobo Inc. to run its digital bookstore.

“If digital is the one area of growth in the industry, you have to set your sights on an Amazon and an Apple, and not worry about the other physical booksellers,” Morningstar’s Wahlstrom said. “Barnes & Noble has bigger fish to fry.”

To contact the reporter on this story: Matthew Townsend in New York at

To contact the editor responsible for this story: Robin Ajello at

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