Edward Lampert is shuffling the assets of Sears Holdings Corp. to raise $380 million — leaving even fewer assets left for him to shuffle.
This story first appeared in the October 3, 2014 issue of WWD. Subscribe Today.
In a further sign of how fast Sears Holdings is bleeding cash and red ink, Lampert on Thursday revealed plans to sell the bulk of retailer’s 51 percent stake in Sears Canada to the group’s own shareholders through a rights offering. Sears Holdings will retain 12 million shares in Sears Canada with an estimated value of $113 million.
Shares of Sears Holdings rose 7.5 percent to close at $27.06 in Nasdaq trading. Shares of Sears Canada slipped 1.1 percent to 11 Canadian dollars, or $9.82, on the Toronto Exchange.
The latest move to enhance liquidity follows Lampert’s $400 million short-term loan last month to the retailer. Presuming completion of the rights offering, the two moves give Sears $780 million in liquidity heading into the holiday season.
Rob Schriesheim, Sears’ chief financial officer, said, “Proceeds from the rights offering will provide additional liquidity to [Sears] as it enters into the holiday period and will be used for general corporate purposes. Together with the $500 million dividend [Sears] received in connection with the Lands’ End spin-off, the $165 million in proceeds from certain real estate transactions and the $400 million short-term loan the company recently completed, [Sears] will have generated up to $1.45 billion in liquidity in fiscal 2014, further demonstrating the company’s financial flexibility and providing it the means to fund its transformation and meet all of its obligations.”
But even that may not be enough. Schriesheim reaffirmed the company’s previous statement that “over the next six to 12 months it intends to evaluate its capital structure” and could take further actions as needed.
Earlier this week, some credit firms, including a few factors, had decided not to approve January deliveries for orders to be shipped to Sears Holdings Corp., which operates retailers under the Sears and Kmart nameplates.
One credit analyst said this is “normal” for this time of year when payment is on 60-day terms for retailers with lackluster credit. Market sources said the major vendors are still supporting the retailer. According to another source familiar with Sears’ vendor list, “less than 3 percent of the company’s gross inventory is factored.”
And while Sears over time has sold off its more valuable assets that leave it with fewer options to maneuver, it still has some real estate holdings and is eyeing strategies for its Sears Auto Center business.
Meanwhile, the $380 million raised from the offering seems to reflect a book-value loss of $272 million, given that Schriesheim told Wall Street analysts in a conference call on Aug. 21 when the company reported fourth-quarter results that the market value of its “51 percent interest was about $765 million as of August 19, 2014.”
At that time, shares of Sears Canada were trading around 16.07 Canadian dollars, or $14.35 at current exchange. The subscription price for each Sears Canada share for the rights offering is 10.60 Canadian dollars, or $9.46.
A spokesman for Sears said that the $380 million to be raised plus the $113 million stake the company will keep has a “total implied value [of] about $500 million. The previously stated value was based on market prices at the time, which were subject to change.” He also added that the company believes “pursuing a rights offering satisfies our dual goal of receiving significant cash value from our stake in Sears Canada and concurrently reducing our investment in Sears Canada.”
The rights offering is expected to be completed by early November.
At least $168 million will go into Sears Holdings’ coffers in mid-to-late October from the exercise of rights that will be held by ESL Partners and Lampert, chairman and chief executive officer of Sears and ESL Investments, a hedge fund. The balance of the proceeds are expected in early November when the offering is completed.
Sears said on Oct. 29, 2013 that it intended to maximize the value of its Canadian operations. In the past year, it has considered several options including the sale of the business. Last month saw the resignation of Douglas C. Campbell as ceo of Sears Canada.
Sears Canada said up to 40 million common shares will be offered for sale. The subscription rights will be distributed to all shareholders of Sears Holdings, and every shareholder will have the right to participate on the same terms on a pro rata ownership basis. Each holder of Sears Holdings common stock will receive one subscription right for each share of common stock held at the close of business on Oct. 24, 2014, the record date for the rights offering. In turn, each subscription right will allow the holder to purchase a pro rata portion of Sears Canada common stock.
In connection with the rights offering, Sears Canada and Sears Holdings also extended the license agreement that gives the Canadian retailer the right to use the Sears name. The new agreement contains some changes, such as requiring Sears Holdings to own 10 percent of the voting shares of Sears Canada for the licensing agreement to remain in effect, and conditions for use of certain trademarks on a royalty-free basis.