Sears

Edward S. Lampert, chairman of both Sears Holdings Corp. and hedge fund ESL Investments, has a $2.6 billion Plan B for the bankrupt retailer — in case his $4.4 billion offer to buy Sears’ assets doesn’t receive “qualifying bid” status.

An ESL affiliate, Transform Holdco LLC, of which Lampert is listed as chief executive officer, submitted a $4.4 billion offer last Friday to acquire the bulk of Sears’ assets in an effort to bail it out of bankruptcy proceedings. Transform is expected to find out this Friday if it will receive “qualifying bid” status so it can move to the next round, a bankruptcy-court approved auction slated for Jan. 14 where it is expected to meet competition from liquidators. According to the Dec. 28 letter Transform sent to Sears’ financial advisers detailing the offer, Lampert also detailed a back-up “Alternative Bid Proposal.” The letter was included in a regulatory filing Wednesday with the Securities and Exchange Commission.

The letter sets forth the assets and dollar amounts Lampert plans to bid on at the auction if he had to bid on them separately, and it specifically stated: “If we were required to bid on the different component assets separately, the aggregate consideration we would be prepared to offer would be significantly less than we have submitted in our Going Concern Proposal.”

The back-up plan is valued at around $2.6 billion and calls for an offer of $5 million in cash conditioned on the continued operation of at least 250 stores as a going concern; $25 million for the Sears Home Services business including Parts Direct, or $5 million plus 50 percent of the value of the Parts Direct inventory if he were to bid just on the Parts Direct component; $100,000 in cash for the IP and data of the Shop Your Way loyalty program; a credit bid of $150 million for certain IP assets including the “Sears” marks and the rights to receive royalties, likely for the Kenmore and Diehard brands, and certain real estate assets.

The real estate component was detailed in a separate letter to JLL, also dated Dec. 28 and included in the filing. The JLL letter has ESL indicating that it would be willing to pay up to $1.81 billion for certain assets, including some ground leases. The amount includes a credit bid of up to $775 million, the assumption of cure costs for some of the leased properties and $35 million in cash as consideration for the “release of ESL and certain buyer-related parties from certain liabilities….” The letter indicated that ESL also proposed to acquire assets owned by certain non-debtors, and therefore outside of the bankruptcy process, for up $608.9 million.

While Lampert has clearly thought out his options, the additional $1.8 billion offered in the going-concern proposal — that would keep an additional 175 stores open — could make for a compelling argument that it should receive “qualifying bid” status. Having more stores in operation translates to keeping more people employed, or as Transform has indicated up, to 50,000 Sears workers. Setting the base at $4.4 billion could give the liquidators pause on what is the real valuation of Sears. Some have argued, including creditors, that the parts of Sears are worth more than the whole. Whether that’s true will depend who is willing to buy what and at what price at auction time.

In the meantime, the official bid from Transform is essentially on the same terms as proposed in a nonbinding offer made by ESL on Dec. 6. One change is the drop to $4.4 billion from the initial $4.6 billion proposed offer, but that also corresponds to the current going-concern offer for 425 stores versus the previously proposed 500 stores. That’s in part due to Sears’ plan, also disclosed last Friday, that it was closing 80 more stores.

The current offer includes a credit bid valued at $1.3 billion, a confirmation of ESL’s right to credit bid and a “full release by the debtors of ESL and certain ESL-related parties from any liability related to any pre-petition transactions involving ESL,” according to the Dec. 28 letter Transform sent to Sears’ financial advisers.

The unsecured creditors’ committee in the Sears bankruptcy has already indicated in court filings that they object to the credit bid — even though bankruptcy law allows for such bids — and have questioned the legality of many of the pre-petition transactions. Those transactions include the formation of real estate investment trust Seritage Growth Properties, funded by the transfer of certain Sears real estate assets, terms of the loans provided by ESL to Sears and other deals such as the spinoff of Lands’ End, which netted Sears $500 million. While the committee has an obligation to review past deals as it tries to find ways to grab back more assets so there’s more money to pay unsecured creditor claims, whether they can actually find something wrong to hang their hat on is debatable. Before the transactions closed, those proposed deals were the subject of financial advice from advisers to both Sears and ESL.

For the committee, it’s about cash and whether there’s any leverage to negotiate a better offer from Lampert. But for Sears’ future, the bankruptcy court in White Plains, N.Y., will have the final say. The court will look at various factors, and sometimes the deal that brings in more money isn’t necessarily always the best offer.

Sears filed its voluntary Chapter 11 petition for bankruptcy court protection on Oct. 15. If Lampert gets to bail Sears out of bankruptcy proceedings, it will be the second time for the hedge fund chairman. In 2003 he bailed Kmart Corp. out of bankruptcy, and a year later engineered the merger of Kmart Holding Corp. and Sears, Roebuck & Co.

Sears

Eddie Lampert  Chris Buzelli