By Phil Wahba and Tom Hals
NEW YORK/WILMINGTON, Delaware (Reuters) - Borders Group Inc
The long-expected Chapter 11 filing will give the second-largest U.S. bookstore chain a chance to fix its finances and shrink its business at a time when buyers are increasingly going online rather than visiting megastores. The bankruptcy could help larger rival Barnes & Noble Inc
Analysts say that Borders' struggles may only have a modest benefit for Barnes & Noble, which needs to focus on its efforts, through its Nook e-reader, to win more of the growing e-books market.
"Barnes & Noble shouldn't be distracted by Borders' bankruptcy," said Morningstar analyst Pete Wahlstrom. "If they let their food off the gas even for a second, Apple
Borders President Mike Edward said his chain "does not have the capital resources it needs to be a viable competitor," noting that Chapter 11 bankruptcy was essential for it to restructure its debt and still operate.
Borders, which started out in 1971 as a small chain of bookstores in Ann Arbor, Michigan, pioneered the concept of superstores in the early 1990s along with Barnes & Noble, but it has struggled to adapt to sweeping technological changes.
Its inability to garner significant online business and its near absence from the growing digital book market have made it difficult for Borders to keep up with Barnes & Noble and online retailer Amazon.com Inc
Borders said in January that it might have to file for bankruptcy if it could not meet conditions for securing a $550 million credit facility from GE Capital, a unit of General Electric Co
In bankruptcy, GE Capital will provide Borders with $505 million in debtor-in-possession financing to allow it to continue operating, contingent on court approval.
Borders' top shareholder is CEO Bennett Lebow, who injected $25 million of his own money last May to try to shore up the bookseller. Its second-largest shareholder is hedge fund Pershing Square, whose manager, William Ackman, has said it was his worst investment ever. In bankruptcy, stockholders are typically wiped out.
Sales at Borders declined by double-digit percentage rates in 2008, 2009 and in each quarter in 2010 it has reported.
The chain's difficulty in coming up with a business strategy has been worsened by the revolving door that its executive suite has been in recent years. The company has had four chief executive officers in the past three years and two chief financial officers in 2010.
Borders, which has a full-time staff of 6,100, operates 508 namesake superstores as well as a chain of smaller Waldenbooks stores.
The company said it would close about 30 percent of its stores in the next several weeks and planned to continue to pay its employees. In recent years, almost all store closures have been at Waldenbooks, as Borders has said its namesake superstores are essential to its brand.
The company said it would honor gift cards and rewards under its customer loyalty programs.
Borders had liabilities of $1.29 billion and assets of $1.28 billion as of December 25, according to documents filed on Wednesday with the U.S. Bankruptcy Court in Manhattan.
The company's largest unsecured creditors include major publishers that provide the books it sells. Borders owes Pearson PLC's
AUTHOR OF ITS OWN WOES
Borders also has felt pressure from budget prices on best-sellers sold at discount chains Wal-Mart Stores Inc
But analysts have faulted Borders for being late to understand bookselling was changing for good.
It was a latecomer to the ebook market, a rare source of growth in the publishing world. The company started its ebook store last July, eight months after Barnes & Noble and nearly three years after Amazon.com.
In what has turned out to be a catastrophic mistake, Borders in 2001 outsourced its online bookselling to Amazon, waiting until 2008 to relaunch Borders.com. In the first three quarters of 2010, those sales still made up only 2 percent of Borders' business.
The chain put itself up for sale in early 2008, but abandoned the process later that year when it found no takers.
Borders, which loaded up debt during an ill-advised attempt to expand overseas, made the mistake of diversifying into CDs and DVDs several years ago, just as sales of those media began collapsing. Its British business ceased operations in 2009.
The case is In re: Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No: 11-10614.
(Reporting by Phil Wahba and Tom Hals; additional reporting by Santosh Nadgir; Editing by Derek Caney and Lisa Von Ahn)
