(Bloomberg) -- Edward Lampert is pushing for a more aggressive breakup of Sears Holdings Corp. as the hedge-fund manager aims to salvage what’s left of the struggling retailer and stave off a potential bankruptcy filing.
The announcement sparked a 7.6 percent share jump to $3.24 on Monday.
Lampert’s hedge fund, ESL Investments Inc., said selling the appliance maker Kenmore, home-improvement services and an appliance part-replacement business would improve the debt profile and liquidity of the beleaguered retailer, according to a statement from Sears. ESL would also be interested in making an offer for real estate -- if requested by the retailer’s board. Lampert’s fund could then lease some or all of the stores back to the company.
ESL, the department-store chain’s largest shareholder, expressed interest in buying Sears assets for cash financed with equity contributions from ESL as well as third-party debt financing. The hedge fund’s non-binding proposal to acquire the home services and PartsDirect assets is based on a $500 million enterprise value, according to the letter.
Lampert has been using his own money for years to keep Sears afloat as its store traffic and sales fall. The 125-year-old retailer, based in Hoffman Estates, Illinois, has relied on asset sales and infusions from the hedge fund manager to offset billions of dollars in losses. It’s also closed hundreds of stores and cut more than $1 billion in expenses.
As part of the proposal announced Monday, ESL also made an offer for Sears real estate which includes the assumption of the $1.2 billion of debt obligations secured by the holdings.
Regardless of whether ESL becomes the ultimate buyer of Sears assets, the fund says that it is interested in seeing that Kenmore, SHIP and PartsDirect are divested in the near term in “a transaction that delivers the greatest value” for the company, ESL said in a statement to Bloomberg. ESL presented the offer as a “holistic” solution to give Sears the run rate it needs to turn around the business, a person close to the matter said.
The proposal is subject to a vote and needs approval from a majority of the company’s minority shareholders.
The transaction also includes an exchange of 50 percent of about $600 million in Sears’ outstanding second-lien debt, not secured by real estate, for equity. It also contemplates a tender offer for 100 percent of about $900 million in the company’s unsecured debt at a discount to par, or for Sears equity. The tender offer and exchange would give liquidity to Sears and reduce its debt, while reducing risk for equity holders and giving Sears more time to pursue strategies to maximize its value, the letter said.
These exchange and tender offers are separate from debt exchanges the company has previously announced, according to the person, who asked not to be named because those details are private.
To assist with the potential transaction, ESL retained Moelis & Company as financial adviser and Cleary Gottlieb Steen & Hamilton LLP as legal counsel.
The moves would further tie Sears to the hedge fund of its CEO and biggest investor, which already lent the retailer $100 million earlier this year. The company’s letter clarifies that Lampert and Kunal Kamlani, ESL’s president, will not participate on behalf of Sears in any discussions, deliberations, negotiations or decisions with respect to the potential transaction, except if explicitly requested by the board.
The retailer’s move to sell some of its assets in hopes of deleveraging the business “does not work when you’re hemorrhaging cash,” said Noel Hebert, an analyst at Bloomberg Intelligence. The retailer’s operations burned through about $1.8 billion in cash in the 12 months ended Feb 3, according to data compiled by Bloomberg. Even with a potential sale of its assets, the company will need to carefully conserve its cash in the near term, Hebert said.
©2018 Bloomberg L.P.