People entering Sears store, Yorkdale Shopping Centre, Toronto, Canada, Northern AmericaVARIOUS

Sears Canada’s trip into insolvency might help untangle the retailer from some of its debts, but it also could draw Edward Lampert and his investor Bruce Berkowitz closer.

The two investors, who have big stakes in Sears Holdings Corp., a separate entity that holds the retailer’s U.S. counterpart and Kmart, are “currently together evaluating, discussing and considering a potential negotiated transaction with the issuer and its subsidiaries in connection” with Sears Canada’s bankruptcy proceedings.

The revelation came in a Securities and Exchange Commission filing from Berkowitz’s Fairholme Capital Management, which also noted that Berkowitz, Lampert and several funds tied to them have engaged Canadian legal council to represent them.

Berkowitz controls 21.1 million shares of Sears Canada, a 20.7 percent stake, according to the filing. Lampert, who is chairman and chief executive officer of Sears in the U.S., controls a 45 percent stake in Sears Canada through ESL Investments Inc., according to Morningstar data. Additionally, Sears Holdings, which spun off the Canadian business in 2012, still has an 11.7 percent stake in Sears Canada.

Sears Holdings shareholders were none too bullish Monday morning, sending shares of the company down 5.8 percent to $7.33 on Wall Street.

In its filing, Fairholme said it may engage the relevant parties in discussions over the Canadian retailer’s “business, affairs, operations, results of operations, contracts, liabilities, properties and prospects, including discussions regarding potential transactions involving the issuer or its affiliates, including, without limitation, financing transactions, purchase and sale transactions or restructuring transactions.”

Although Sears Canada is a discreet business from Sears Holdings, how its bankruptcy plays out is significant for the U.S. retailer since could show Lampert and Berkowitz might navigate the process should Sears and Kmart’s debts become unmanageable.

Observers have been predicting a Sears Holding bankruptcy for years, seeing a slow motion liquidation, while Lampert vehemently maintains he is working to transition the business to a stronger membership model and navigating a tough retail climate.

Lampert, in a blog post Friday, said the U.S. company would shutter another eight Sears stores and 35 Kmarts “as we continue to focus on our best stores and return to profitability.”

“We have fought hard for many years to return unprofitable stores to a competitive position and to preserve jobs and, as a result, we had to absorb corresponding losses in the process,” Lampert wrote. “So it is obvious that we don’t make decisions to close stores lightly. Our efforts have been, and will continue to be, fact-based, thoughtful and disciplined, with the goal of making Sears Holdings more relevant and more competitive for our members and other constituents.”

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