The credit crisis engulfing America’s banking system yesterday threatened the independence of Borders, the retailer of books and DVDs, which put itself up for sale and admitted that it had been forced to seek emergency funding.

Borders, which yesterday reported annual sales of $3.8 billion (£1.9 billion) for 2007, said that it had appointed JPMorgan Chase and Merrill Lynch, the Wall Street investment banks, to “explore strategic alternatives”, including a sale of the entire company or a break-up.

George Jones, chief executive, said that he had been trying to secure new funding but that “the current credit environment had made many of these alternatives prohibitively expensive or entirely unavailable”.

Mr Jones said that Borders would have experienced liquidity problems in the next few months had it not managed to secure an emergency cash loan of $42.5 million from its largest investor – the hedge fund Pershing Square Capital Management. He also said that he had scrapped the group’s dividend to try to conserve capital.

The UK and Ireland arm of the company was bought by the entrepreneur Luke Johnson, chairman of Channel 4, for £10 million last year.

Shares in Borders last night closed down 28 per cent at $5.07, a record low.

Mr Jones admitted to shareholders that “the company can give no assurances that a transaction of any kind will occur”.

Barnes & Noble, America’s biggest book chain, said that it would consider making a bid if approached about a possible deal by the advisers to Borders. It added that it had not yet been approached by bankers from either JPMorgan Chase or Merrill Lynch.

Borders was yesterday valued in the stock market at just over $300 million, about 8 per cent of its total annual sales.

Announcing its annual results, Borders said that it had total group debt of about $554 million. For the calendar year of 2007, group sales were $3.8 billion, up by 4.2 per cent on 2006. However, it made a loss over the year of $157 million, which included a $125 million charge related to the sale of Borders in the UK and the Irish Republic to Mr Johnson.

Mr Jones said that he had secured an agreement with Pershing whereby Borders could force its shareholder to buy part of the book chain’s international operation, which included businesses in Australia, New Zealand and Singapore. Borders said that Pershing had already offered to buy some of those businesses for $125 million. As part of the emergency loan arrangement with Borders, Pershing will receive options to buy a 19.99 per cent stake in the company at $7 a share.

Borders is trying to fend off competition not only from Barnes & Noble but also from online retailers, to which customers have been turning for cheaper books, CDs and DVDs.

Gary Balter, an analyst for Credit Suisse, the investment bank, told clients in New York: “Borders effectively announced . . . that they are out of cash and took a stop-gap funding. We see little opportunity in the near term for Borders to be sold, with the No 1 candidate, Barnes & Noble, not likely to pursue a deal.”

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