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Borders on the verge of bankruptcy

| 23 November 2009 09:46

After British chain WHSmith backed out of a deal with Borders, the British retailer, formerly a subsidiary of the U.S. megastore bookseller, is desperately looking to stave off bankruptcy and Chapter 7 liquidation.

I love Borders and have been an avid shopper at countless Borders stores near where I have lived in D.C., L.A., New York, London and elsewhere on the road.  But, honestly, it doesn’t make sense to me that WH Smith was in the bidding for Borders in the first place. WHSmith are a more a news agent.

As for liquidation, this is what I fear.  Look at what happened to Linens ‘N Things, another potentially viable company sunk by leverage in an overpriced private equity deal. Just as the credit crunch hit, they ran into funding problems. Starved for capital, they were liquidated – a deadweight loss to the economy.

Below, the Telegraph reports on Borders:

The high street retailer is thought to be holding discussions with groups including HMV as the threat of collapse draws nearer.

Borders was bought in July from Channel 4 chairman Luke Johnson’s Risk Capital Partners, in a management buyout backed by Valco, a private equity firm.

However, the company has been hit by competition from supermarkets and the increasing strength of online retailers as the recession continues to hurt consumer spending. Borders has also suffered from the tightening in the credit insurance market, which has made it difficult to obtain stock from suppliers.

The company’s management is now worried that it does not have enough cash to trade successfully through the busy Christmas period…

Last week, WH Smith ended talks about buying the bookseller. The company had been hoping to sell 36 of 45 outlets to WH Smith while its subsidiary, Books etc, held closing-down sales at the remaining stores.

Note: this article originally referred to these moves as applying to Borders US. However, the Valco-owned entity involves only the UK operations.

Update: Borders’ website suspends book sales – BBC. This refers only to Borders UK.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

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  • Anonymous

    The US entity has real problems but doesn’t appear to be in any immediate danger of collapse. The Telegraph article refers to the U.K Borders which was divested from the US entity in 2007.