Borders Heading for Liquidation?

This is not good news. Worth reading:

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Uncertainty over exactly what Najafi Companies intended to do with Borders if they bought it led to the collapse of their purchase offer by the end of Wednesday, and now the chain is headed to liquidation unless another bidder comes forward or Najafi prevails during the actual auction. The bid from liquidators that Borders had submitted to the court at the same time as the Najafi offer has been made the "stalking horse bid" for the July 19 auction, which just received Judge Martin Glenn's approval this morning in court, pending filing of revised papers. Glenn, whose patience was wearing thin in the hearing, said, "Right now all we have is one bid, which is a liquidation bid. I have a busy calendar." The judge postponed the deadline for any objections from 4:00 today to 4:00 Monday, thus deferring any ruling on the myriad of objections. If a going-concern bid is put forth, revised notice will need to be filed with the court.

Borders attorney Andrew Glenn told the court there are currently no other bidders, but he indicated that there are "some inquiries" in which interested third parties might team up with the liquidators. He also mentioned that Barnes & Noble has offered for "certain assets." (Earlier in the process Bloomsberg said that BN had bid to buy Borders' web site, customer databases and about 10 store locations.) Najafi's representatives indicated they may still participate in the auction itself. Meanwhile, the representatives for the creditors' committee told Judge Glenn that they support the liquidators' stalking horse bid, saying they "got what we wanted."

Also in court this morning, Judge Glenn showed little tolerance for the landlord's many conditional laments. "I'm very unsympathetic to many of the objections made by landlords," Judge Glenn said, particularly since the situation remains fluid. He appears more inclined to not address the landlords' objections until the final path for Borders is clear--and indicates that issues related to going-out-of-business sales tend to be negotiated outside of court anyway. Borders has asked for the currently-scheduled July 21 hearing to approve a sale to be split in two, asking for a second hearing on Saturday, July 23 in the event that any "going concern" bids come forward, but there is no resolution on this yet. (These updates have been relayed live from the courtroom via Sarah Weinman, and the hearing was just adjourned.)

The strong hand of the creditors committee was a driving force in much of the drama of the past 24 hours. In Wednesday's day's preamble, the creditors filed an objection in bankruptcy court to Najafi's offer, which was so open-ended as to allow the possibility that he would still cancel leases and liquidate the chain while keeping "valuable intellectual property (i.e., the Borders name and related intellectual property rights) and other assets for less consideration" than the current bid from liquidators would yield. (As we pointed out previously, the liquidation bid provides more cash up-front, and still leaves the intellectual property and other assets to be sold separately.)

What the creditors wanted was for Najafi to make "a firm commitment" to keep operating the chain as a going concern, which the creditors said they "in fact would welcome." But Najafi used that demand to put forward the same request that Borders management had failed with multiple times--asking major publishers to resume normal trade terms, once again providing the real operational financing for the bookstores. (As we also pointed out previously, Najafi's offer was closer to "taking" the chain rather than "buying" it.) As the WSJ reported, "Najafi was willing to drop his liquidation option if publishers agreed to grant him normal trade terms, according to people familiar with the matter. Some major publishers agreed, but by late Wednesday afternoon a couple hadn't, the people said. At that point, Mr. Najafi signaled he wouldn't alter his terms."

In their filing, the creditors committee also presented some slightly revised estimates of Borders' current situation. They owe the DIP lenders $211 million, and are estimated to have $417.5 million in inventory, with the liquidation bid worth "no less than between $252 million and $284 million."

So the contingent bid from liquidators was made the sole and official stalking horse bid, setting the floor for the auction on July 19. In a note to employees yesterday evening from Borders ceo Mike Edwards, he wrote: "Late this afternoon, Najafi informed us that they have decided to withdraw as the stalking horse proposal and therefore we will submit the Hilco and Gordon Brothers proposal to the Court for the purposes of serving as the Stalking Horse bidder at the auction next week. While we regret Najafi's withdrawal as the Stalking Horse bidder, we remain hopeful that they or other potential bidders who are interested in operating Borders as a going concern will choose to participate in the auction process on July 19. "

In their own statement, Najafi Companies said that their "proposed agreement to keep Borders operating is no longer supported by the deciding parties. The deciding parties' legal team and financial advisors have elected another option which is in contrast to what we had envisioned for the future of Borders. However, we remain willing, ready and able to move forward should the deciding parties instead choose to work with us and our existing offer. From day one, our intention had been to keep Borders intact and to provide the best long-term outcome for Borders' loyal customers, publishers, employees and the entire book industry. We are disappointed with today’s decision." In court Thursday, it became clear that Najafi is no longer seeking approval of the $6.45 million break-up fee that was provided for when they were set for approval as the stalking horse bidder.