Financier Bennett LeBow Poised to Take Control of Struggling Borders


It wasn't so long ago that Borders (BGP), the second-largest brick-and-mortar bookseller in the country, was on life support. A critical $42.5 million loan from its primary stakeholder, Pershing Square Capital, was due on Apr. 1. More worrying, there was doubt about the status of its revolving credit agreement for more than $400 million, backed by Bank of America (BAC).

Then, at the eleventh hour, both situations were resolved satisfactorily, and an additional $25 million in new equity needed to guarantee those loans came through less than a week before Borders reports its first-quarter earnings for 2010.

Today, the company announced that financier and Vector Group (VGR) chief Bennett LeBow has bought $25 million worth of stock at $2.25 a share through a separate investment company. He has become the company's single largest shareholder. He'll also join the Borders board of directors and become chairman, replacing Richard "Mick" McGuire, who has resigned.

LeBow is currently chairman of holding company Vector Group, which is primarily involved in tobacco businesses and some real estate concerns. Another Vector Group executive, President and CEO Howard Lorber, also joins Borders' nine-member board.

Rich Incentive to Invest

"Ben's investment will improve the company's capital position and provide greater stability as we execute strategies to transform the brand," said Borders Group Interim President and CEO Mike Edwards in a statement. "As an astute investor and business operator with a strong technology background and proven experience with driving company turnarounds, he will play an extremely important role in helping us redefine the Borders brand that's so critical to unlocking a turnaround for Borders."

How does a company with so many documented financial woes get additional cash infusions? The publishing industry newsletter Publishers Lunch points out that LeBow has quite the incentive to invest some of his millions --
a warrant that would allow LeBow to buy another 35.1 million shares at the same price of $2.25.

If by some slim possibility the measure is voted down by Borders' shareholders, "the company is forced to give LeBow 35.1 million 'stock appreciation rights' instead, in which they would basically pay him cash if the stock price moves above $2.25," according to Publishers Lunch.

As for primary stakeholder Pershing Square? They make out like happy bandits as well -- they'll receive
2.7 million warrants at an exercise price of $0.65 a share on what stock LeBow buys and 8.6 million warrants on top of LeBow's projected warrants.

CEO: Interim to Permanent?

The news of LeBow's investment and board appointment came the day after Borders held its annual meeting in Ypsilanti, Mich., in which the company discussed some of its general strategy going forward. A lot of it revolved around matters digital, especially the Kobo e-reader, which Borders will sell at $149.99 and distribute in its stores starting on June 17.

But the Detroit Free Press seems to think the meeting was a
Mike Edwards bid to turn his interim CEO job into a more permanent one. All Edwards told the paper was that he was "very committed and passionate about the Borders brand." The bookseller could use some stability at the top -- Edwards is its third CEO since the beginning of 2009.