By  on January 5, 2017
Sears

Sears Holdings Corp. has one asset sale down — Craftsman for $900 million — but many, many more are expected to follow. The deals are all part of Sears chairman Edward S. Lampert's desperate rush to keep his flailing retail operation afloat.On Wednesday the company said it would shutter 150 more stores — 109 Kmart locations and 41 Sears sites — to help stem its losses. That’s on top of the more than 200 stores it was already on track to shutter before the end of the current fiscal year this month. On Wednesday, Sears also inked a deal with affiliates of Lampert’s hedge fund ESL Investments — Lampert is chairman of both Sears and ESL, and there is a Sears board subcommittee on related party transactions working with outside advisers on the transactions — for a $500 million real estate-backed loan. A week ago, the ailing company signed another deal with ESL affiliates for standby letters of credit for up to $500 million.Sears is still exploring options for its two other iconic brands — appliance stalwart Kenmore and automotive batteries brand DieHard. It also could sell its Sears Home Services business, as well as its Sears Auto Center operation. If all that weren't enough, the company is looking to raise $1 billion through more asset sales from its fast-shrinking real estate holdings.But if anyone still wondered just how bad Sears’ financial picture is, the sale of Craftsman, one of its iconic and proprietary brands, for only $900 million to Stanley Black & Decker is further proof. Back in October, Stanley Black & Decker was mentioned as the lead candidate to acquire the company, with speculation that talks were centered on a purchase price of nearly $2 billion. Given the 55 percent reduction, observers say Stanley Black & Decker got a great brand at a fire sale price.And Stanley Black & Decker didn't even have to put up all the cash right away. Under the terms of the deal, Stanley Black & Decker will pay Sears $525 million at the closing of the transaction, plus another $250 million at the end of year three, and annual payments on new Stanley Black & Decker Craftsman sales through year 15. Payments are calculated at a rate of 2.5 percent of sales through 2020, 3 percent through January 2023 and 3.5 percent thereafter. Sears in turn will receive a license to continue to sell Craftsman products that will be royalty-free for the first 15 years, but will have to start paying a royalty payment of 3 percent after year 15.Existing sales of Craftsman branded products outside of Sears Holdings and Sears Hometown distribution channels will be assumed by Stanley Black & Decker upon closing. Those sales not connected to Sears’ distribution channel were about $200 million over the last 12 months.What’s interesting is that the deal presumes that Sears will be around in 2020 to receive the $250 million. If not, would creditors in a bankruptcy be entitled to grab onto that payment to settle debts? Raising the “B” word began last year when credit ratings agencies started to focus on Sears’ cash burn rate. The conclusion was that Sears probably could raise enough cash to survive another year, possibly even two, via asset sales. But the agencies also believe that Sears needs around $1.5 billion in liquidity if it wants to survive another 12 months. It might need even more than $1.5 billion to guarantee some measure of near-term survivability.Sears on Thursday provided a fourth-quarter update, noting: “Sales have continued to be challenging during the quarter to date. Same-store sales at Sears and Kmart for the first two months of [the fourth quarter] have declined in the range of 12 to 13 percent. We have continued to manage inventory and costs closely and our current quarter to date adjusted earnings before interest, taxes, depreciation and amortization performance is largely in line with last year, despite the sales declines.”Craig Johnson, president of retail research and analytics firm Customer Growth Partners, said, “Sears may well be around in some form [in another year], maybe still even smaller yet again.”When Lampert merged Kmart and Sears, Roebuck & Co. in 2005 in a transaction valued at $11 billion to form Sears Holdings, the combined entity had projected annual revenues of $55 billion and more than 3,500 stores in operation. It had been expected to start its new fiscal year in February with less than 1,500 stores in operation, and will now have even fewer with the additional 150 store closures.With the $1 billion liquidity access in the two deals with the ESL affiliates, plus the $525 million from the Craftsman deal once it closes, it might appear that Sears now has some measure of financial breathing room. But that’s where a little ambiguity begins to set in.Craftsman is part of the three iconic proprietary brands that have long been considered Sears' crown jewels. In 2006, Lampert securitized the intellectual property assets of the three brands, with the brands backing $1.8 billion in notes. Ownership of the IP assets was moved to a separate entity called KCD IP, although it is believed that Lampert has control over the entity. Licensing fees pay the interest on the notes. While the KCD entity is considered bankrupt remote, KCD is also listed as one of several assets that has a “ring-fence” in an agreement with the Pension Benefit Guaranty Corp., the government-run entity that ensures pension plans. The terms of that “ring-fence” agreement aren’t clear.A Sears spokesman said, “We expect to seek a consent from the PBGC in connection with the transaction.” That suggests that while the boards of Sears and Stanley Black & Decker have approved the Craftsman deal, Sears may still need the OK of the PBGC.

Shares of Sears on Thursday closed up 0.3 percent to $10.39 in Nasdaq trading, but had traded as high as $11.19 earlier in the day when the company disclosed the Craftsman deal. Nearly 3.1 million shares changed hands, compared with a three-month average trading volume of 956,379.

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