Deja Vu…. More Sears Holdings Corp. Fears…..

As the holidays approach, the retailer’s $4.1 billion credit line should be sufficient to stock its shelves, given that it needed roughly $3 billion last year. But come March, the facility will shrink to just $2.4 billion. That could mean a dicey winter in 2010 if the economy remains tough.


In that case, Sears Holdings may want to extract cash from its Canadian business. Sears Canada is one of the largest retailers in the country and continues to build cash on its balance sheet. Of the parent’s $1.292 billion in gross cash, $824 million belongs to Sears Canada, its 73% subsidiary.


Unfortunately, Sears Holdings can’t touch the Canadian cash unless it buys the entire company. It tried a deal in 2006 but was blocked by Pershing Square Capital, which owns more than half of the 27% minority stake.


Since the standoff, Sears Canada has paid no dividends and let its cash sit idle. Locked in a strategic standstill, Sears Canada’s shares have been depressed, trading at 12 times earnings for the year ending January 2011, according to brokerage Desjardins Securities in Toronto. Sears Holdings, meanwhile, has a multiple of 48 times consensus earnings.


Sears Holdings probably can’t afford to attempt another squeeze out. Sears Canada has about $500 million in net cash, but the market value of the shares that Sears Holdings doesn’t own is about $600 million. Paying any premium to satisfy Pershing would leave Sears Holdings with less cash.


More likely, Sears Holdings will need to shed the Canadian business. The question for investors is how long they are willing to wait.

- This so called problem doesn’t arrive until Fall 2010 when they ramp up for Christmas. I believe Sears will see FCF in 2009 of $500 million and 2010 of over $500 million, at least, and therefore Sears won’t die if their net $1.7 billion of financing is taken away in 2010. They can stop buybacks and self finance, though it won’t be necessary; someone else will provide financing if necessary (see next bullet).


- I believe Bruce Berkowitz has said he would provide inventory financing for Sears if no one else will, though he thinks Sears can find it cheaper elsewhere.


- Regarding the minority Sears Canada stake. Sears and Ackman are playing the waiting game to see who will flinch first. I don’t think SHLD feels any pressure to flinch at this point. Ackman may someday realize that he isn’t in control of Sears Canada and can find better returns elsewhere. Ackman can double his money every 3.5 years with the 20% returns he gets (I believe they are 20%, or more). It doesn’t make sense for him to hold out forever, though he might just do it.

Craftsman tools are sold at Fastenal.com. I haven’t checked to see if they are sold in Fastenal stores yet, they may just be sold online, but I really like this move either way. From what I understand Fastenal is a highly regarded company/brand and it’s exciting to see Craftsman teaming up with another great brand when branching out of the Sears/Kmart umbrella.