Sears bankruptcy-led auction offers lifeline

March 2019 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

March 2019 Issue

The chairman of iconic US retailer Sears Holdings Corp has won a bankruptcy auction to buy the company after submitting a revised offer of $5.2bn. The auction win, in which all the other bidders were liquidators, meant that Sears avoided a total shutdown, keeping around 400 stores open across the US and preserving around 45,000 jobs.

Eddie Lampert’s hedge fund ESL Investments Inc was selected as the winner at a bankruptcy court-supervised auction after his latest bid topped an earlier $4.4bn proposal. The potential sale still requires court approval before the transaction can be finalised – the hearing to approve the sale is scheduled for 1 February. Provided the closing conditions are satisfied, the transaction is expected to complete in early February.

“We are pleased to have reached a deal that would provide a path for Sears to emerge from the chapter 11 process,” said the restructuring committee of the board of directors. “Importantly, the consummation of the transaction would preserve employment for tens of thousands of associates, as well as the relationships with many vendors and suppliers who provide Sears with goods and services. We would like to thank our dedicated associates, vendors and partners for their continued support through this process, and most importantly the members and customers we have the privilege to serve.”

Though the deal may win bankruptcy court approval, there is likely to be significant opposition to the transaction from Sears’ unsecured creditors. In a court filing, the official committee of unsecured creditors said that it opposed the sale to Mr Lampert and asked court permission to file under seal a complaint against ESL for years of misconduct.

“Over the course of Lampert’s and ESL’s reign, Sears closed over 3500 stores, cut approximately 250,000 jobs, and lost untold billions in value,” the filing says. “In effect, Lampert and ESL managed Sears as if it were a private portfolio company that existed solely to provide the greatest returns on their investment, recklessly disregarding the damage to Sears, its employees, and its creditors.”

The committee wants to disallow the debt that ESL used to bid for Sears and wants to unwind deals from recent years that the committee said benefited Mr Lampert, including the sale of real estate assets.

In response, ESL noted that its loans and other transactions involving Sears were focused on keeping the company alive while helping it to evolve. “ESL Investments, Inc. has been a constant source of financing for Sears Holdings over the past several years, including through the extension of $2.4 billion in various secured financings to the company,” the hedge fund said. “All transactions were done in good faith, on fair terms, beneficial to all Sears stakeholders and approved by the Sears Board of Directors…We reject any assertion to the contrary and will vigorously contest any effort to assert claims against ESL, its principals or affiliates concerning these transactions.”

Sears, once omnipresent in US retail, has suffered greatly from the rise of ‘big-box’ retailers and, more recently, the emergence of e-commerce giant Amazon. Following its 2005 merger with K-Mart, Sears became the nation’s third-largest retailer, with $55bn in annual revenue and 3500 stores. As recently as five years ago the company still had around 2000 Sears and Kmart stores, however the company has failed to turn a profit since 2010 and by the time it filed for Chapter 11 bankruptcy protection in October 2018, had accumulated around $5.6bn of debt. Sears’ sales have fallen from $53bn in 2006 to less than $17bn in 2017. Last year, Sears announced plans to close 142 unprofitable stores at the end of 2018, though many more store closures have been rumoured. The company also divested a number of its more valuable brands and real estate assets to plug sales losses.

It is unlikely that the proposed sale of the business to Mr Lampert will bring an end to Sears’ bankruptcy proceedings, however, as ESL will only be buying the company’s assets. Disposing of the other assets and liabilities is expected to take months or years.

Richard Summerfield