By Mike Spector and Joseph Checkler
The fate of Borders Group Inc. hangs in the balance this weekend, with a Sunday deadline looming for the bookstore chain to either find a buyer or face liquidation.
A judge on Thursday said Borders could auction itself off with an opening bid from a group of liquidators, less than 24 hours after the bookseller's negotiations to sell itself to private-equity investor Jahm Najafi collapsed.
At a morning court hearing, Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan approved procedures for an auction of Borders, which will take place Tuesday should any suitors emerge to challenge the liquidators' bid led by Hilco Merchant Resources and Gordon Brothers Group.
Borders, which employs nearly 11,000 people, will go out of business for good, absent a buyer emerging to keep the chain running.
"Borders remains focused on working with interested parties to develop a going-concern transaction," said Mike Edwards, Borders Group's president, in a statement. "We strongly believe in the value of Borders as an iconic brand with significant long-term potential in the publishing industry," he said, adding that the company appreciates efforts from publishers, landlords and customers to keep the chain alive.
Mr. Najafi's company declined comment.
The possibility remains that Mr. Najafi could make a new offer for the chain that would satisfy creditors. Any new bids are due by 5 p.m. Sunday, though Borders is likely to entertain offers that might save the company up until Tuesday's auction.
At Thursday's hearing, Borders said it hoped Mr. Najafi or other parties will come forward with a bid that would keep the company in business. A subsidiary of Mr. Najafi's Direct Brands offered $215 million for Borders's assets and would have assumed about $220 million in liabilities. But Borders late Wednesday pivoted to naming the liquidators as the so-called "stalking-horse" bidder after creditors had objected to Mr. Najafi's bid.
The creditors, including major publishers and landlords, argued Wednesday that the liquidators' bid would potentially pay them more. They complained that Mr. Najafi's bid gave him the option to liquidate the company after he bought Borders, a scenario in which creditors would fare worse. The creditors said the liquidators' bid already had the potential to pay them between $252 million and $284 million.
The creditors said they would support Mr. Najafi's bid if he dropped his option to liquidate the company. Mr. Najafi, in exchange, wanted guarantees from publishers that they would relax terms under which they ship Borders merchandise. Publishers had been demanding cash in advance before shipments.
Some major publishers agreed, but a couple still hadn't by late Wednesday afternoon, and Mr. Najafi signaled he wouldn't alter his deal terms, according to people familiar with the matter.
Andrew K. Glenn, a Borders lawyer at Kasowitz, Benson Torres & Friedman LLP, told Judge Glenn that Borders had engaged in "round-the-clock negotiations" with Mr. Najafi, to no avail.
"This has been a case with many twists and turns and the events of the last 24 hours are no exception," Mr. Glenn said. "Unfortunately, [Mr. Najafi] would not commit in time for this hearing."
Mr. Najafi released a statement late Wednesday saying his original offer, with the liquidation option, remained on the table but "was no longer supported by the deciding parties." Mr. Najafi said he remained willing to move forward if Borders chose to resume talks and negotiate his existing offer.
Dozens of landlords of Borders's 399 remaining stores objected to a tight timetable between the July 19 auction and a July 21 sale hearing, but Borders said it might try to break the sale hearing into different parts so parties would have more time to decide whether to object. Judge Glenn said he liked that idea.
The tricky part for Borders would be if a bidder emerges that wants to keep Borders's stores running; that bidder would have to decide how it will treat the leases on the remaining stores.