The hedge fund run by Sears CEO Edward Lampert issued its strongest warning to date that the retailer must “immediately” take steps to right itself, calling on the company to restructure debt and sell off assets.
Lampert’s ESL Investments wants Hoffman Estates-based Sears Holdings Corp. to restructure more than $1 billion in debt and sell about $1.5 billion in real estate and about $1.75 billion in other assets, including the company’s popular Kenmore appliance brand, according to a proposal made public Monday in a regulatory filing.
ESL offered to buy Kenmore and certain other divisions of the retailer’s business in April. But the latest proposal is broader and pushes the company to act more quickly in the face of “significant near-term liquidity constraints,” including a $134 million debt payment due next month.
In the proposal, ESL said it thinks its approach will be better for the company’s stakeholders than “alternative options to address (Sears’) liquidity challenges.”
The hedge fund didn’t specify what those alternatives entail. But Sears has additional debts coming due in 2019 and 2020 — in part because of earlier efforts to cover losses by pushing debts down the line. If the retailer can’t address those payments, a bankruptcy filing would be one possible alternative, said Christina Boni, a vice president at Moody’s Investors Service.
Lampert has said he thinks Sears’ stakeholders will be better off if the company can pull off a turnaround while continuing to operate. Retailers that enter bankruptcy court intending to restructure and remain in operation — as Carson’s parent Bon-Ton Stores did when it filed for Chapter 11 protection in February — can end up liquidating if they fail to find an investor or buyer to keep the business going.
Sears said Monday that it had received ESL’s proposal and directed the company’s management and advisers to work with the hedge fund. A board committee already negotiating with ESL on the proposal to buy Kenmore will review the proposed real estate deal, Sears said.
One of the most dominant retailers of the 20th century, Sears has lost more than $11 billion since 2011 and has struggled to win back shoppers. The company closed hundreds of Sears and Kmart stores and sold pieces of its business, including the Craftsman tools brand. The retailer closed its last Sears store in Chicago in July and has announced plans to close another 46 stores by November, including a Kmart in Steger and a Sears in Bloomington.
Sears also sold more than 200 stores in 2015 to real estate investment trust Seritage Growth Properties, in which Lampert holds a stake and serves as chairman of the board.
Lampert, in a blog post on Sears’ website earlier this month after another disappointing quarterly earnings report, acknowledged the company’s turnaround “has taken far longer than we expected.”
Sears’ credit rating is “about as low as you can have absent some sort of transaction involving restructuring,” whether in bankruptcy court or an out-of-court deal, said Bob Schulz, managing director at S&P Global.
While Sears has made some progress on improving its retail business, it needs to make a lot more than it has, he said.
ESL said its proposal would reduce the company’s debt due between now and 2020 by about $4.3 billion, if all proceeds from selling real estate and other assets were used to pay down debt. That would leave the company with $1.2 billion in outstanding debt, freeing up cash to invest in the retail business.
Lampert’s stake in Sears’ turnaround goes beyond his role as chairman, CEO and largest shareholder. In addition to his real estate interests through Seritage, he and affiliates of his hedge fund have lent the company more than $1.6 billion in the past 2½ years.
In August, ESL proposed buying Kenmore and a piece of Sears’ home services division, valuing the businesses at $400 million and $70 million to $80 million, respectively. In Monday’s proposal, the fund said it could work with other real estate lenders to ensure the company can sell off real estate assets. If those sales don’t generate enough cash to pay off real estate debts, ESL and other lenders would form a consortium to buy the remaining properties and extinguish those debts.
Lampert’s willingness to invest in the retailer makes it tougher to say just how much runway the company has left, Moody’s Boni said.
“In a more traditional situation, liquidity would be even tighter, but there has been considerable external support,” she said. “It’s a unique situation.”
Sears said any transaction would need the approval of its board and a subcommittee overseeing transactions with related parties.