Jessica Hall and Dhanya Skariachan

PHILADELPHIA/NEW YORK - Hedge fund manager William Ackman is raising his wager on bookseller Borders Group Inc , offering to help it buy larger rival Barnes & Noble Inc for $963.7 million.

The potential bid, which got a lukewarm reaction from analysts, would value Barnes & Noble at $16 a share, a 20 percent premium from Friday's closing price. The company's stock hit a high of $15.80 before closing at $14.69, up 10.6 percent. Borders gained 28.7 percent before closing at $1.39.

Both booksellers have struggled with competition from online retailers and electronic books. Borders lacks its own e-reader, but Barnes & Noble has been investing in its Nook e-reader to compete with rivals such as Inc and Apple Inc . Google Inc began selling digital books on Monday.

While we think this is a reasonable offer, we do not anticipate that Leonard Riggio, (Barnes & Noble's) founder, chairman and largest shareholder, will find it sufficient, said Standard & Poor's Equity Research analyst Michael Souers.

Most Barnes & Noble shareholders would likely hold out for a higher price since the retailer's stock fell below $16 only in recent months, Souers said. Barnes & Noble's stock has dropped about 26 percent so far this year. Borders' stock had fallen about 9 percent this year before Monday's gains.

Analysts doubted there would be significant antitrust concerns about a deal because of the competition from online retailers and electronic books.

Barnes & Noble spokeswoman Mary Ellen Keating declined to comment on the potential bid, which was disclosed in a regulatory filing.

Borders confirmed Ackman's willingness to provide funding for a deal and said it previously expressed to Barnes & Noble an interest in a business combination.

A deal could help the companies cut the number of their stores, but does not answer more pressing issues, said Morningstar analyst Peter Wahlstrom.

It doesn't solve the needs for increased pricing power for these companies, it doesn't solve the issue of needing to generate additional volumes, and it doesn't create long-term competitive advantages, said Wahlstrom.

Ackman's Pershing Square Capital owned about 15 percent of Borders as of September 30. Ackman, who would have a 37 percent stake if all warrants are exercised, is known for making big and often noisy bets on undervalued companies.

Ackman has targeted other companies in recent months, including Fortune Brands Inc and JC Penney Co Inc .

Barnes & Noble has not yet received a written offer from Ackman or Borders, a person familiar with the situation said. Five potential suitors are eyeing the company, down from as many as 20 that showed interest during the first round of bidding, said the source, who requested anonymity because the talks were not public.


A merger would give the booksellers more clout with publishers, authors and others in the growing e-book market, said Stifel Nicolaus analyst David Schick.

I think that bookstores doubling their negotiating power in the e-book game makes some sense, Schick said.

The combined company could reduce costs by cutting overlapping stores and administrative expenses, analysts said. Borders has about 1,000 stores, while Barnes & Noble operates more than 700 stores.

I think it's a very big undertaking and frankly, more of a distraction at a time when each one of these companies should be focusing on their own operations, Wahlstrom said.

Borders said in September that its debt, net of cash, totaled $262.1 million. Barnes & Noble's long-term debt totaled $376.9 million at the end of the second quarter.

In May, financier Bennett LeBow agreed to buy a 15.5 percent stake in Borders, overtaking Ackman at the time as the bookseller's largest shareholder. He also joined the retailer's board and became its chairman.

Borders, which has suffered from shrinking sales and market share, recently redeployed some floor space to toys and games for children. Borders is scheduled to report third-quarter results on December 9.

In September, Barnes & Noble defeated dissident shareholder Ron Burkle's push to win a seat on its board. Shareholders recently ratified a poison pill to stave off any attempt by Burkle to take over.

The idea of combining the booksellers is not new. Ackman previously told Reuters that Borders was still not out of the woods and questioned whether there was room for two national bookstore chains in the United States.

Borders to me is kind of dying a long slow death, Souers said. What Bill Ackman is trying to do is trying to save the company by combining it with a slightly stronger company ...; it's a weakening industry and Borders is behind the curve.

(Reporting by Nivedita Bhattacharjee in Bangalore, Dhanya Skariachan in New York and Jessica Hall in Philadelphia. Editing by Roshni Menon, Lisa Von Ahn, Dave Zimmerman, Robert MacMillan and Richard Chang)