Borders Files Chapter 11

Feb 17, 2011 3:14 AM  By

Three years after Borders Group considered placing itself on the selling block, the books and music merchant has filed for Chapter 11 bankruptcy.

Borders sought protection from its creditors in the U.S. Bankruptcy Court in Manhattan. According to the filing, Borders had $1.28 billion in assets and $1.29 billion in debts as of Dec. 25.

The 40-year-old company, which also operates Waldenbooks chains, plans to close about 200 of its 642 stores by the end of April, says Borders spokeswoman Mary Davis. All of the stores closed will be superstores; the move will affect about 6,000 employees.

“It has become increasingly clear that in light of the environment of curtailed customer spending…and the company’s lack of liquidity, Borders Group does not have the capital resources it needs to be a viable competitor,” Borders Group president Mike Edwards said in a release. The Chapter 11 filing will allow Borders to access new capital and reorganize its operations, he added.

In addition to the economy, Borders’ late response to macro factors such as the growth of ecommerce and digital downloads made the Chapter 11 filing inevitable, says Neil Stern, retail analyst and senior partner for Chicago-based retail consultancy McMillan Doolittle.

“It will be interesting to see what happens post-bankruptcy with a number of stores closing,” Stern says. But the macro trends aren’t going away, and they will remain a challenge as Borders moves forward, he says.

Chris Kampe, managing director with investment firm Tully & Holland, compares Borders to Blockbuster. “Technology (digital books and e-readers) on one hand and Internet retail (Amazon) on the other have squeezed Borders’ profit model,” he explains. “Borders suffered from negative comparable store sales growth in its brick-and-mortar stores for years and its Walden Books mall-based chain is unprofitable.”

Borders has significant debt with virtually no equity, so the bankruptcy will allow it to reorganize, restructure its debt, and close its unprofitable stores, Kampe says. “It should emerge from bankruptcy a healthy entity in the short term.” Kampe adds.

But Borders does not have a prepackaged Chapter 11 filing, like Orchard Brands went into last month and Oriental Trading just came out of.The fact that Borders couldn’t secure a prepackaged Chapter 11 filing l did “suggests that it won’t be a simple solution,” Stern adds.