Edward S. Lampert’s plan to acquire Sears Holdings Corp. out of bankruptcy is garnering strong opposition from several creditors, with some pushing instead for a liquidation of the retailer.
The battle for the future of Sears could be decided on Monday, when the parties are slated to appear before a bankruptcy court judge in White Plains. The original date for the hearing was Friday. Earlier this month, Sears selected a $5.2 billion going-concern offer from Transform Holdco, LLC, an affiliate of hedge fund ESL Investments. Lampert is chairman of Sears and ESL, as well as chief executive officer of Transform.
The going-concern offer, if approved by the bankruptcy court judge, would keep at least 425 stores in operation, and save nearly 50,000 jobs. Usually, giving companies a second chance–especially if it means saving jobs–is the preferred outcome of many business bankruptcies. But Sears isn’t the typical debtor, and Lampert’s involvement with Sears over the years has raised a number of issues.
Service.com filed an objection over the weekend because the bankruptcy court in November had already approved its purchase of Sears’ Home Improvement business for $60 million. That deal never closed. The closing date was extended twice, and then the deal was then terminated by Sears after Lampert’s going-concern offer was accepted by the retailer. The court document said Service.com is hoping the court either will reject the sale in its entirety, or at least exclude from the sale the home improvement component so Service.com can go ahead and close on its court-approved transaction.
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Over the weekend, the Pension Benefit Guaranty Corp. filed an objection to Lampert’s planned purchase of Sears. The PBGC, a U.S. government agency that steps in to protect private pension plans for pensioners when companies can’t meet their funding obligations, said on Jan. 18 that it would step in and take responsibility for Sears’ two defined-benefit plans. The two plans combined are underfunded by $1.74 billion.
In court papers, the PBGC said it has claims against Lampert and ESL. Separately, it also has claims to the Kenmore and DieHard intellectual property assets under an agreement from March 2016 for a “ring-fence” of certain assets to help fund the Sears’ pension obligations. Craftsman was part of that ring too, until Sears obtained permission to sell the brand to Stanley Black & Decker in January 2017 in a deal valued at $900 million.
The PBGC opposes the IP sale to ESL because it ignores the interests of the agency under the prior “ring-fence” agreement. It also said that if the sale is to proceed, both Sears and Lampert have to allocate a value associated to every acquired asset per bidding procedures previously approved by the bankruptcy court. The asset purchase agreement has the dollar value for the IP assets listed at zero.
The PBGC objection is separate from the objection of the unsecured creditors committee in the Sears bankruptcy. A spokesman declined comment on the PBGC objection. The PBGC is also a member of the committee, as is mall owner and operator Simon Property Group.
The committee previously filed court papers opposing the proposed sale of Sears to Lampert and ESL, claiming that Sears’ downfall was “precipitated by years of misconduct by Lampert, ESL, and others against Sears and its creditors.”
In a recent filing on Saturday, the committee said a sale to Lampert and ESL would “render the debtors’ estate administratively insolvent.” The legal papers also said the sale is “premised upon an unreasonable and unrealistic business plan and liquidity forecast.” Furthermore, the document added that the sale is “inferior to the higher and better alternative,” which is the orderly liquidation through a going-out-of-business process “for the benefit of all of the debtors’ creditors.” The committee remains opposed to Lampert’s use of money owed to him and ESL as a form of credit-bidding for Sears.
Unsecured creditors are typically at the bottom of the food chain when it comes to receiving any form of recovery in a bankruptcy. The committee in the Sears bankruptcy has an obligation to try to recover as much money as they can to bring in more funds to disperse to unsecured creditors. It is saying that past transactions between ESL and Sears, such as the formation of Seritage Growth Properties using the transfer of real estate owned by Sears and the spinoff of Lands’ End, were done with the purpose of benefiting Lampert and ESL, and represented a conflict of interest.
ESL has maintained that past transactions were between the parties were given the okay by outside advisors, as well as the approval of the Sears board.
But since money is the issue, perhaps Lampert still might be able to avoid a liquidation of Sears and get his acquisition done if he could be persuaded to add more money to his accepted offer.
Sears filed its voluntary Chapter 11 petition for bankruptcy court protection on Oct. 15.