Sears Falls as CEO Lampert Pushes to Raise Money for Looming Debt

Company seeking to avoid bankruptcy

Author's Avatar
Sep 24, 2018
Article's Main Image

Sears Holdings Corp. (SHLD, Financial) shares traded 3.15% lower Monday afternoon after CEO Eddie Lampert’s hedge fund ESL urged the company to “act immediately” as it faces large payments on its debt.

Lampert’s ESL laid out a plan for the company to meet its “significant near-term liquidity constraints,” including $134 million in debt payments due next month. The proposal would reduce 78% of Sears’ debt to $1.2 billion and cut its interest expenses by 80% to $88 million while adding $1.2 billion in liquidity over two years, ESL said in a letter to Sears.

“Given the current situation, we believe that substantial progress must be made on the transactions described in this or any other proposal that Sears may pursue without delay,” the letter read.

In addition to offering up to $1.12 billion in debt conversion, ESL asked the company to market its real estate portfolio, which could fetch $1.5 billion. It also recommended asset sales of $1.75 billion. Those assets would include the previously suggested sales of Sears Home Services and Kenmore, with other unnamed assets.

Together, the steps would shrink the company’s debt, excluding mandatorily convertible liabilities, to $1.2 billion from $5.59 billion.

The letter suggested that taking drastic measures while the company is still in business would be preferable to other options, likely alluding to filing for bankruptcy.

“We continue to believe that it is in the best interests of all stakeholders to accomplish this as a going concern, rather than alternatives that would substantially reduce, if not completely eliminate, value for stakeholders,” the letter read.

Lampert is the company’s largest shareholder and holds a significant portion of its debt. In the letter, he said ESL maintains the goal of returning Sears to profitability and gaining “sufficient runway to continue its transformation.”

In the past year, 82% of Sears’ market cap has collapsed as the company has attempted to stay afloat in a changing real estate landscape. The price, once as high as above $130 per share in 2007, had slumped to $1.24 as of Monday.

248331217.png

As sales flagged, the company has not turned a profit since 2012, reporting a $383 million loss in 2018. Sears’ revenue has declined every year since 2008, when it reached $53 billion, and fell to $16.7 billion in the most recent fiscal year.

949280567.png

In a statement, Sears confirmed receipt of the proposal, saying it was working with ESL but “There can be no assurance that any transaction will be consummated or on what terms any transaction may occur.”

Despite many investors, including Bruce Berkowitz (Trades, Portfolio) of Fairholme Fund (Trades, Portfolio)s, reducing their Sears share holdings, one prominent investor tracked by GuruFocus, Lee Ainslie (Trades, Portfolio), added more. Ainslie, head of Maverick Capital Ltd., increased his Sears position by 89.5% to 1,334,058 shares, or 2.14% of the company’s outstanding shares, in the second quarter. Other investors with modest positions are Murray Stahl (Trades, Portfolio) with 0.15% of shares and Francis Chou (Trades, Portfolio) with 1.04%.