NEW YORK — Sears and Kmart may be at the altar and ready to wed, but another suitor is in the wings that could drive up the final dowry.

Vornado Realty Trust, the real estate investment trust, could be close to upping the stakes in the bidding for Sears, sources in the retail real estate and finance community said Friday. Vornado, with Steven Roth as chief executive, already owns 4.3 percent of Sears.

Vornado began buying Sears stock last fall and has been rumored since early December to be eyeing the possibility of a joint bid for Sears. REITs by law are prohibited from operating corporate businesses and Vornado is said to be prowling for a financial partner capable of doing that in order to make a bid.

Sources said the REIT’s current involvement in Sears could result in two scenarios: Vornado mounts a last-minute bid and wins Sears, or a Vornado offer forces Kmart Holdings Corp. chairman and hedge-fund wizard Edward Lampert to raise his $11 billion bid in order to gain control of Sears. Bids, sources said, could reach the $12 billion mark.

Vornado’s interest in Sears is believed to be one of the things that drove Lampert to make his bid for the Chicago-based retailer last November. Lampert’s offer to combine the struggling Sears and Kmart into the third-largest store chain in the nation sent tremors through American retailing that are still being felt, with a wave of speculation about who next might buy or combine with whom. The speculation involves everyone from Federated Department Stores to Liz Claiborne Inc., May Department Stores to Saks Inc. and Neiman Marcus Group to Ann Taylor Stores.

If all goes according to Lampert’s plan, the combination of Sears and Kmart is set to close by mid-March. A spokesman for Kmart declined to comment, while a representative for ESL Investments, Lampert’s investment vehicle, could not be reached for comment.

Vornado executives also could not be reached for comment Friday, while a Sears spokesman said the retailer is “still awaiting regulatory approval and at some point we’ll have a shareholders’ meeting and the shareholders will vote on the merger’s approval.

“It will probably be sometime in early March,” the Sears spokesman added. “All is proceeding on schedule. We cleared the Hart-Scott-Rodino [Antitrust Improvements Act] hurdle in early January. We’re now waiting to hear from the Securities and Exchange Commission. At some point we will have the vote.”

This story first appeared in the February 14, 2005 issue of WWD. Subscribe Today.

The spokesman declined to comment when asked whether the Sears board had received bids from other interested parties.

“We’re making good progress as we go forward, but we still have a few hurdles to cross,” he added, referring to shareholder approval and integration of the two companies. “We think there’s a compelling business case for it [the combination of Sears and Kmart].”

That may not stop Vornado. Sources said Vornado lost out on a bid for the Mervyn’s division of Target Corp. last year when another group of financial investors bought it and has been eager to make a retail deal since.

Vornado certainly faces hurdles in making a higher Sears bid, even if it finds a financial partner. As a practical matter, it generally is hard to make a bid for a company once a merger agreement is in place since those deals generally place restrictions on discussions with other parties.

“It may be tough for him [Roth] to get in when the Kmart-Sears deal is supposed to close in a month and it has already gotten antitrust clearance,” one real estate source said.

Others, however, weren’t prepared to count Vornado out, even at this late stage.

“Roth is a very clever guy,” a real estate source specializing in the department store sector said. “He is a long-term player. He tried to go after Mervyn’s because he wanted the real estate, but lost out on that one. Sears would be a significantly bigger deal.”

In a research report from Dec. 17, Citigroup Global Markets REIT analyst Jonathan Litt wrote, “We do not believe the Sears-Kmart merger is a done deal just yet. We think Vornado could team up with a private equity partner or another retailer to bid for Sears.”

Litt didn’t rule out the possibility that another “dark-horse bidder may still emerge,” given the apparent value in Sears’ shares. He wrote that his analysis suggests a real estate value of Sears at between “$8 billion and $10 billion,” versus his prior estimate of “$4 billion to $6 billion.”

He added, “We have also refined our analysis of the Craftsman and Kenmore brands, and we now estimate Sears’ total value could be $15 billion to $17 billion, or $70 to $80 per share.”

Competing bidders for Sears would have to be prepared to pay a hefty break-up fee to Kmart. According to Litt’s report, the break-up fee in the Sears-Kmart deal is “$400 million, or $2 per share.”

Financially, based on Sears’ 2004 results, Kmart is paying a multiple of 25 times earnings, a fairly rich multiple for a struggling retailer. In addition, Kmart has its own set of brands — including Joe Boxer, Martha Stewart Everyday and Thalia — and Sears owns such brands as Kenmore and Lands’ End, which could create cross-synergies through merchandising all the brands in both stores. Those advantages would be lost in any bid for Sears by a nonretailer. That puts further pressure on any third party coming in to bid for Sears to have a compelling story in order to stop the Kmart-Sears transaction.

Speculation about Vornado’s interest in Sears gained speed when the REIT filed a shelf registration with the SEC. A REIT analyst, who could not speak on the record because his firm doesn’t cover Vornado, cautioned, though, that too much shouldn’t be reach into the filing since many companies routinely refile just to maintain a degree of financial flexibility.

Proceeds received from the sale of shares are often used for general corporate purposes, another way of enhancing a company’s liquidity. In the case of Vornado, it could also be preparing for what it hopes to be a winning bid on the Polo store in Manhattan at 72nd Street and Madison Avenue, with the purchase price possibly going as high as $70 million.

Vornado is already active in the retail real estate world, as well as in the office markets in New York and Washington, D.C. Its office holdings in both cities total about 25 million square feet. The company owns about 30 percent of New York City retail property owner Alexander’s, while its other retail properties include about 90 shopping centers. Vornado’s Merchandise Mart division owns 10 properties, including Chicago’s Merchandise Mart and the Los Angeles Mart. It also produces trade shows.

From a financial standpoint, the REIT is on solid ground and could easily find a partner to bid on Sears. At the close of Vornado’s most recently reported quarter, ended Sept. 30, 2004, the REIT had total assets of $8.1 billion and long-term debt of $4.2 billion. The company’s cash and cash equivalents totaled over $200 million. Earlier this month, more cash poured in when Vornado was repaid $275 million in loans it secured via an interest it had in New York’s General Motors building.

The question now is whether there are any other bidders for Sears out there other than Vornado. Lampert’s bid for the retailer revealed its true value and, given the whirlwind of speculation in financial and retail circles recently and the $120 billion in hedge fund money out there, some institutions might believe Sears is an opportunity too good to pass up.

Still, the real estate source who specializes in the department store channel said, “All the real estate guys look at these types of deals. I can’t think of, nor have I heard of, anybody else who would want to play in this arena, not even Sun Capital or Cerberus at this point.”

 — With contributions from Arthur Zaczkiewicz and Sharon Edelson