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What if Amazon Bought Sears?

Should online retailer Amazon acquire ailing mega-chain Sears? According to Forbes contributor Robin Lewis, such a merger would result in a boon for both.

In a column for Forbes magazine entitled “Why Amazon Should Acquire Sears?” (Forbes, 4/17/14) Lewis argues that Amazon’s primary business need is to increase the overall scope of its omnichannel operations. While the company has become a dominant presence online, it has no corresponding physical infrastructure to facilitate off-line sales. If Amazon were to purchase Sears, it would immediately add approximately 2,400 stores (roughly half of those Kmart locations, and half Sears). All these stores could “double as distribution centers” for Amazon, broadening its reach as a retailer.

Also, Lewis contends that Amazon would have the leverage as a buyer to insist that Sears include its still powerful appliance division as part of the package, giving it domain over Kenmore products, Craftsman tools and DieHard batteries. Each of those brands has taken a trouncing in the last few years, losing some of their historic luster, but are still in good enough shape that they could “be re-energized.”

And what benefit accrues to Sears? Plagued by chronic underperformance, Sears CEO Eddie Lampert seems to have figured out that the retailer’s most valuable assets are its realty, and has been quietly “managing the business into liquidation.” Over the last two years, Sears has sold almost a dozen stores in the U.S. and Canada, some of them admittedly among their best money makers. Some industry experts have speculated that Eddie Lampert was originally attracted to Sears precisely because of the value of its real estate. One of Sears’ investors, Baker Street Capital, issued a report recently that said the retailer’s 350 remaining locations were collectively worth $7.3 billion. Consider that Sears’ total market capitalization is approximately $600 million.

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Sears has even taken to leasing its existing space to third-party vendors, like Western Athletic Clubs Inc., which rented a colossal 69,000 square feet in Cupertino, California. In 2012, Sears allocated a grand total of $378 million to store improvements, a paltry sum in comparison with competitors like Kohl’s Corp., which spent $785 million and Macy’s, which parted with $942 million.

Sears has been raising capital by selling off its realty, often choosing the best performing stores because they command higher purchase prices. Unable to reinvigorate languishing sales, Sears has relied upon the value of its realty as a centerpiece of its turnaround strategy. In 2012, Sears earned more than $47 million in revenue from multiple leasing arrangements. Since 2011, Sears has leased major commercial space to other marquee retailers: Whole Foods, Forever 21, Bay Club and Northgate Gonzalez Markets and Dick’s Sporting Goods have all moved into space operated and formerly occupied by Sears.

So, as Lewis sees it, Lampert is more than amenable to a quick acquisition. Eddie Lampert’s own personal fortune is deeply entangled with that of Sears’ since he is simultaneously a major shareholder and bondholder. His hedge fund, ESL Investments Inc., owns a hefty 48 percent of Sears as well as $95 billion of the company’s unsecured bonds and $3 million of its unsecured notes. Lampert personally owns 25,120,220 shares of the retail giant, about 23 percent of the company. Lampert also personally owns $169 million of Sears’ commercial paper debt. Despite Lampert’s financial involvement in Sears, there are some signs that he has carefully begun to withdraw his position. ESL is slowing down its supply of commercial paper–or short-term debt typically assumed to cover the cost of daily operations–to Sears. Sears owes ESL $285 million in IOUs. Some financial analysts interpret ESL’s reluctance to continue the steady stream of dollars to Sears as an indication that Lampert is insulating himself against personal losses by diminishing his exposure to the retailer’s troubles.

Additionally, Sears has struggled to improve its ecommerce competency, moving more of its product online but realizing a minimum of benefit for its trouble. On the other hand, if Amazon has a signature strength, it’s the fact that is has “mastered ‘Big Data’” and knows “how to use it strategically.” As an example, Lewis says that Amazon “has the ability to guide customized or ‘localized’ assortments into each of the store locations based on local consumer preferences.” This synergy alone could justify the merger.

Lewis acknowledged that such a multifaceted merger would not be without its challanges. “The financial complexities involved in such a deal are beyond my pay grade, particularly since Eddie engineered a total reorganization of the business: morphing its structure into some 30 business units; establishing the securitization of brands – ‘unlocking value’ as Eddie called it – and other aspects that might give the dealmakers a royal headache.”

Lewis also conceded that neither “Sears or Kmart names are not on anyone’s ‘value-added’ list.” He said, “Sears and Kmart’s financial plunge; the physical deterioration of their stores; the fragmented and ‘siloed’ operations; strategically chaotic merchandising and marketing strategies and ad hoc implementation, all have contributed to the decimation of the consumers’ perception of the brands.”

Nevertheless, Lewis is convinced not only that the acquisition of Sears by Amazon redounds to the benefit of both, but also that this is the last, best hope for Sears to rescue itself from an otherwise inevitable demise. “If Sears and KMart aren’t discarded in this kind of a deal, at some point in the very near future, they will end up in the trash bin of history.”