By Mike Spector and Jeffrey A. Trachtenberg
Borders Group Inc. stood on the brink of liquidation after a recent offer for the bookstore chain from a private-equity investor fell apart late Wednesday.
Borders, which employs nearly 11,000 people, designated a group of liquidators as the opening bidders in a looming bankruptcy-court auction amid difficulties getting publishers to relax terms under which they ship merchandise to the U.S.'s second-largest bookstore chain, said people familiar with the matter.
The development raises the prospect that Borders will soon close all its remaining 399 stores and go out of business. No other suitors have so far emerged for Borders ahead of a Sunday bidding deadline.
Borders's deal with the investor, Jahm Najafi, unraveled Wednesday after publishers and landlords owed money from the company complained that his bid would allow him to liquidate the bookstore chain after buying the business.
Mr. Najafi had offered $215 million for Borders, plus an assumption of $220 million in liabilities. The terms allowed him to operate the chain as a going concern or to liquidate the business. A creditors committee said an offer of at least $252 million from a group of liquidators made for a better deal.
Creditors were essentially concerned that Mr. Najafi would pay $215 million in cash for Borders and then liquidate the chain. With that potential scenario lurking, the creditors preferred Borders sell itself to a group of liquidators in a deal they believed would pay them more money ranging between $252 million and $284 million.
They also objected to a $6.5 million break-up fee Mr. Najafi was set to receive if another bidder topped his offer.
Mr. 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.
Time was running short, with Borders set to address a bankruptcy judge early Thursday to seek approval of Mr. Najafi's bid and procedures for an auction next week. The bookstore chain pivoted to anointing liquidators as the opening bidders in the auction, set for Tuesday.
In a letter to employees Wednesday, Borders President Mike Edwards said that Mr. Najafi had withdrawn his bid and that liquidators were now circling the company. He told employees he remained hopeful other suitors would emerge to keep Borders in business before next week's auction.
In a statement, Mr. Najafi denied he had withdrawn his bid and said the offer was "no longer supported by the deciding parties." The liquidation bid, his statement said, was "in contrast to what we had envisioned for the future of Borders." Mr. Najafi said he remained willing to move forward with a deal "should the deciding parties instead choose to work with us and our existing offer."
Borders filed for bankruptcy protection in February and has since been bleeding cash and closed more than a third of its stores. Amid mounting losses, the bookstore chain put itself up for sale in a last-ditch attempt to survive.