A Sears store.

Edward S. Lampert is coming to the rescue of Sears Holdings Corp. yet again — and would no doubt profit from his proposal for a further dismantlement of the group.

Lampert is both chairman of Sears and the hedge fund ESL Investments. On Monday, Lampert essentially sent a letter to himself, as chairman of ESL, to the board of Sears. That letter offered to acquire certain assets of the retailer’s — namely, its well-known Kenmore appliance brand and the home improvement and PartsDirect businesses of Sears Home Services. The letter, which pegged the value of the home improvement and parts businesses at $500 million, said ESL contemplates entering into an agreement with Sears so the two businesses could servicing customers following their acquisition. ESL further said it would be interested in acquiring certain real estate owned by Sears for $1.2 billion, with the understanding that Sears would enter into a master lease so “some or all” of the stores could continue operations. ESL did not detail the number of stores it hopes to acquire. The Kenmore brand is an intellectual property asset.

Sears on Monday confirmed that neither Lampert nor Kunal S. Kamlani would participate in any acquisition discussions with ESL to keep those talks at arm’s length. That presumes ESL gets the nod from both a special committee of Sears’ board and the disinterested stockholders — not including ESL, which holds a 48 percent stake in Sears — who hold a majority of Sears’ common stock. Kamlani is president of ESL, and has served on Sears’ board since 2014.

The letter from Lampert of ESL to Sears’ board, of which Lampert is chairman, noted at the outset that ESL is the largest stockholder of Sears and a substantial lender, said, “We understand that Sears had marketed certain of these assets for nearly two years, but…has been unable to reach agreement with potential purchasers on acceptable terms….” ESL said it believes Sears should aggressively pursue a divestiture of the assets. It went on to say, “In our view, pursuing these divestitures now will demonstrate the value of Sears’ portfolio of assets….”

While the rhetoric placed emphasis on how divestiture now demonstrates the value of the assets, it actually reflects how Sears can’t find a buyer and needs a rescue from ESL to yet again shore up its balance sheet. ESL said whether it is the hedge fund or some other third party as buyer, selling now allows Sears to improve its debt profile and liquidity position. And it adds certain other so-called protective measures such as a “go shop” process to allow for better offers as another indication that the proposed deal is an arms-length transaction given the inter-company connections.

ESL helped Lampert fund his acquisition of Kmart Holding Corp., which it bailed out of bankruptcy in 2003 after gaining control of a bond that Lampert acquired for less than $1 billion. Kmart then merged with Sears Roebuck & Co. in an $11 billion deal in 2005. The combined entity began operating under the name Sears Holdings Corp. At one point, shares of Sears Holdings were trading at $198.18. While some investors hailed Lampert as the next Warren Buffett, skeptics even back then questioned what the hedge fund manager saw in the two retailers, not to mention what they considered to be his lack of merchandising know-how. What Lampert has done over the years has been viewed by critics as the equivalent of a slow liquidation of Sears, even as he has generated millions in profits for himself and his fund through the long series of financial machinations he has undertaken to keep the retailer afloat.

The practicalities of Monday’s proposed series of deals only seem to confirm what critics have said ­­— that Sears would eventually go bankrupt and it wouldn’t matter because anything of value would have already been sold to a third party or acquired by Lampert. The retailer had a cash burn rate of $1.6 billion in 2016 and $1.8 billion in 2017, as forecast by credit ratings agency Fitch Ratings.

In 2006, ownership of the intellectual property of Sears’ key brands — Kenmore, Craftsman and DieHard — was transferred to a bankrupt-remote entity owned by Sears but controlled by Lampert called KCD in a $1.8 billion securitization bond. Sears is charged a licensing fee for use of the brands. Craftsman was sold in 2017 to Stanley Black & Decker for $900 million, and Sears has a license to sell the brand for 15 years, after which it will begin paying a royalty payment of 3 percent after year 15. In 2011, Orchards Supply Hardware Stores was spun off, followed a year later by the spin-off of Sears Hometown and its Outlet business.

More recently in 2015 Sears transferred 254 of its top store sites to Seritage Growth Properties, a real estate investment trust that was the brainchild of Lampert. Where Sears is still operating a storefront, it now pays rent to Seritage, adding to its overhead expense structure. Lampert in 2014 also completed the spin-off of Lands’ End. Along the way to raise cash, there have been rights offerings for senior unsecured notes and warrants, not to mention store closings to consolidate operations and the company’s expense structure.

The troubled retailer in January raised $100 million in new financing, and has since completed a so-called distressed exchange that pushes out its debt maturities and reduces its interest burden. In March, when it posted fourth-quarter results, the company posted net income of $182 million, or $1.69 a diluted share, against a net loss of $607 million, or $5.67, a year ago. But that’s deceiving as far as the state of its operations. Earnings in the quarter were boosted by $470 million from federal tax changes. The company’s comparable-store sales — sales for those stores open at least one year — tell the real story of how well or poorly a retailer is doing. In the case of Sears Holdings, total comps in the fourth quarter fell 15.6 percent, with Kmart comps down 12.2 percent and Sears stores declining 18.1 percent.

Before the Seritage transfer, Sears Holdings began 2015 with 1,700 Sears and Kmart big-box stores in operation, or about 200 million square feet of space. While not insignificant, it was still a 50 percent drop from the 3,400 stores in operation for the year ended Jan. 28, 2006, following the 2005 merger of Kmart and Sears. For the year ended Feb. 3, 2018, the total store count was 1,002, comprised of 432 Kmart stores, 547 Sears full-line stores and 23 Sears specialty stores.

Lampert for his part has bragged about how he is transforming Sears into an asset-light company that is focused on a technology-driven, member-centric Shop Your Way platform. And he’s been blogging about how the company is “fighting like hell” and making progress, even as its financial condition continues to worsen.

Regardless of the future for Sears, any transaction for Kenmore and its home businesses with ESL would give Lampert and his hedge fund the right to license out those assets, as well as expand the businesses to other outlets. Sears last August inked a licensing agreement for its Kenmore and Kenmore Elite brand, giving Cleva North America Inc. the right to manufacture vacuums and accessories for retailers for distribution around the world. Sears also made available its Kenmore Smart appliance products on Amazon.com.

And given that Sears still has a dwindling real estate base that it can draw from for more asset sales, it likely has enough cash runway to continue operations past the holiday season and into 2019. With the precautions to ensure arm’s-length negotiations, the proposed deals would also likely avoid any questions arising over clawbacks and preferential transfers should a bankruptcy filing occur. Such clawbacks and preferential transfers have a 90-day look back period.

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