Borders to end cafe pact with Seattle's Best

By Nick Brown

NEW YORK (Reuters) - Bankrupt bookstore chain Borders Group Inc <BGPIQ.PK> plans to end a pact with Seattle's Best Coffee and to begin operating its own in-store cafes as it restructures and tries to become profitable.

The move would allow Borders to reduce licensing fees as it works toward emerging from bankruptcy, a spokeswoman said on Thursday.

Seattle's Best cafes, part of Starbucks Corp <SBUX.O>, had been a staple of nearly all of Borders' more than 400 superstores since the parties signed a licensing agreement in 2004.

Borders, which helped pioneer the concept of book superstores, filed for bankruptcy protection in February after years of falling sales made it impossible to manage its debt load.

Last week, a person close to the matter said the bookseller had received indications of third-party interest for its business that could keep it running as a going concern.

From the beginning of its 2007 fiscal year until its bankruptcy filing, Borders had net losses totaling about $680 million.

The company will seek court approval for the termination of its leases with Seattle's Best, according to a filing in U.S. Bankruptcy Court in Manhattan. It is seeking permission to file the motion under seal to keep the lease terms private.

An attorney for Borders did not return a call seeking comment.

Running its own cafes would save Borders money and allow it to tailor menus to customer needs, the Borders spokeswoman said.

An attorney for several of Borders' landlords said the company has also considered bringing in a new vendor or using different vendors at different stores to localize customers' cafe experience.

"Borders told us they wanted to expand the cafe offering beyond just coffee and snacks that really only make sense in the morning," Robert L. LeHane, of Kelley Drye & Warren LLP, told Reuters.

"Most customers visit Borders in the afternoon and evening, so we agree" with the move, LeHane said.

For Seattle's Best, the move would mean the closure of more than 200 of its roughly 350 remaining cafes.

It would be the second wave of closures for the company, which lost an additional 200 cafes when Borders shut down many stores before filing for bankruptcy.

Seattle's Best spokeswoman Jenny McCabe said the company "enjoyed the opportunity" to partner with the bookseller and has "a very significant business outside of Borders that is fast-growing and has a lot of momentum."

Under U.S. bankruptcy rules, debtors generally have the right to shed leases they consider burdensome.

Seattle's Best has been expanding elsewhere. Its coffee is sold at Burger King Corp and Subway restaurants and is available on Delta Air Lines Inc <DAL.N> flights.

Starbucks, which acquired Seattle's Best in 2003, in February separately ended a contract that had allowed Kraft Foods Inc <KFT.N> to distribute its packaged coffee in North America and Europe.

In afternoon trading, Starbucks shares were up 1.3 percent to $37.10 on Nasdaq, while Borders shares were up 2.6 percent to 20.9 cents on the pink sheets.

The case is In re Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-10614.

(Reporting by Nick Brown; Editing by Lisa Von Ahn, Tim Dobbyn and Gerald E. McCormick)