Borders Group Inc. chose Direct Brands, a company owned by private-equity firm Najafi Cos., as the opening bidder in a looming bankruptcy-court auction of the big bookseller, the companies said Thursday.

Direct Brands, a music, DVD and book distributor whose businesses include Book of the Month Club, would purchase substantially all of Borders' assets for $215.1 million, plus the assumption of about $220 million in liabilities.

Borders was required to file court papers by Friday to name an opening bidder for the auction, which is set for July 19. The court filing was expected late Thursday, said a person familiar with the matter.

To capture the opening bid, or so-called stalking-horse spot, Phoenix investor Jahm Najafi's firm beat out another private-equity investor, Alec Gores.

Mr. Gores declined to comment.

If Direct Brands ultimately wins Borders, the retailer would operate as a wholly owned subsidiary of Direct Brands, the companies said. Direct Brands didn't indicate how many Borders stores it would keep open or close. The companies said that Gordon Brothers Group and Hilco Merchant Resources LLC agreed to acquire any store locations that are ultimately not included in the sale and will close those stores in an orderly manner.

"We are pleased to take another important step forward as we position Borders for a vibrant future and sustainable earnings growth," said Mike Edwards, the company's president, in a statement Thursday.

A stalking-horse bidder like Direct Brands is often in the driver's seat during bankruptcy court auctions, as it typically stands to reap breakup and other fees if competing bidders succeed in their bids. Borders would have to pay about a $6.5 million breakup fee should another suitor emerge to top Direct Brands' offer, a person familiar with the matter said.

The fate of the second-largest U.S. bookstore chain is riding on the outcome of the auction. Borders, which employs more than 11,000, has said it will liquidate absent a deal with a buyer who would keep the chain operating as a going concern.

Direct Brands' opening bid gives Borders a chance to survive. But liquidators could also bid at the auction and beat its offer. Borders could be obligated to accept a bid from liquidators if it provides a better deal for lenders, publishers, landlords and other creditors.

Mr. Najafi is a veteran investor with ties to publishing and retailing. Publishers crucial to Borders' survival know Mr. Najafi and his firm from his July 2008 purchase of the Book-of-the-Month Club, the Doubleday Book Club and Columbia House from Bertelsmann AG. He took several information-technology platforms, call centers and distribution centers used by the clubs and consolidated them into one.

Borders hopes to fetch between $250 million and $350 million in a sale. It has been clinging to life in the weeks leading up to the auction. The retailer negotiated changes to its bankruptcy financing earlier this month to avoid closing another approximately 40 stores, but it had to pay lenders a $1 million fee to do so. Borders' bankruptcy judge reluctantly approved the financing changes.

The company has racked up losses of more than $191 million since seeking bankruptcy protection in February, according to financial reports through May 28. It has closed more than a third of its stores since then, leaving it with roughly 400 outlets, according to a recent company tally.

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