Borders hoists for sale sign

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(Fotune) -- Unable to sell many books, Borders (BGP) has bowed to its activist investors and enlisted bankers to help sell the company.

The big-box book chain says it has lined up $42.5 million in financing from major stakeholder Pershing Square Capital to keep its doors open. The company also killed its dividend and has hired JPMorgan and Merrill Lynch to explore options. Borders' shares plummeted 21% Thursday on word of the deal.

The news comes ahead of the Ann Arbor-based retailer's earnings release expected at the end of trading Thursday. And if rival Barnes & Noble's (BKS, Fortune 500)disappointing numbers are any indication, Borders isn't going to have good fourth-quarter financials to report.

As the No.2 book retailer, Borders has been crushed by its larger ever-present competitor Barnes & Noble, as well as increased wins by discounters like Wal-Mart (WMT, Fortune 500) and Costco (COST, Fortune 500). The company has also been vexed on the online sales front. After what some publishing industry observers note was a disastrous ecommerce effort in the late 1990s, Borders threw in its lot with a less-than-lucrative partnership with Amazon (AMZN, Fortune 500). The company has since said it plans to unveil its own Web site next month. The current version is still in beta.

Accelerated decline. But the speed of Borders' collapse is shocking coming amid attempted turnaround efforts engineered by CEO George Jones last year, a move that included the introduction of kiosks to tap the digital media market with sales of MP3s and audiobooks. In September, Jones told investors on an earnings call that he was confident that the plan was on the "right path" to generate "sustainable sales and earnings growth for the company beginning in 2008."

This abrupt strategic turnaround coincides with the arrival on Borders' board of Pershing Square Capital partner Richard McGuire in January. Investor activist Bill Ackman's shop Pershing Square holds a 26% stake in Borders and is thought to be the catalyst for the seeking-buyers strategy. Ackman and his representative did not return calls for comment.

Ackman may be best known as the investor who essentially convinced Wendy's (WEN) to spin off its pancake chain Tim Hortons (THI) in an IPO in 2006.

Part of Pershing Square's financing agreement includes the sale of overseas subsidiaries. Pershing has agreed to buy Borders' Paperchase chain of paper stores and units in Singapore, Australia and New Zealand. That deal however, requires that Borders first seek buyers for those businesses before Pershing steps in with a floor price of $125 million.

$1B in debt. As of November, Borders was operating in the red with a $222 million accumulated net loss on $2.4 billion in sales for the first three quarters of 2007, according to the most recent filing. The company carries about $1 billion in total debt and was down to $65 million in cash as of the third quarter.

No immediate buyout candidates seem obvious at this point. Barnes & Noble would likely relish the opportunity to eliminate its closest rival, but antitrust regulators could find some issues with that.

Looking ahead to the financial report later today, analsyts expect Borders to post an adjusted profit $1.42 a share for the fourth quarter. That is down from the year-ago earnings of $1.61 a share. Sales in the busy holiday quarter are to have hit about $1.4 billion, which is down from the $1.52 billion level in the same period last year.