While Sears Holdings Corp. chairman Edward S. Lampert continues negotiations with the retailer’s creditor constituency groups, the expectation now is that a decision will be made on Wednesday.
That’s because the retailer is expected to head into court Wednesday to tell the bankruptcy court judge its decision on whether it will accept Lampert’s bailout plan. The plan it last filed with the Securities and Exchange Commission a week ago detailed a bid that Lampert’s hedge fund ESL Investments valued at “over $5 billion.” The offer was made by ESL affiliate Transform Holdco, LLC, of which Lampert is chief executive officer. Lampert is also chairman of Sears and ESL.
The new bid was raised from an initial $4.4 billion bid made last month, which didn’t go over too well with creditors who were looking for more cash on the fear that the initial bid would have left Sears administratively insolvent. The bid on the table when the parties headed into the court-approved auction Monday included more cash, but one sticking point was the release that Lampert’s bid insisted on to insulate him and ESL from any legal claims that could arise from allegations that past Sears deals with ESL represented a conflict of interest.
Shortly after Sears filed its voluntary Chapter 11 petition for bankruptcy court approval on Oct. 15, an unsecured creditors committee was formed and its members almost immediately began looking at past deals to see if they had any legal claims that could put more money back into the retailer’s pockets. In bankruptcy parlance, an entity that is under bankruptcy court protection has what is referred to as the debtor’s estate, and in the Sears bankruptcy the committee’s role is to see where it can find funding–often referred to as clawbacks–to return that money to the estate for use to pay the claims of unsecured creditors.
In the case of Sears, past deals include the creation of Seritage Growth Properties, a real estate investment trust formed through the transfer of certain properties that Sears owned, and the spin-off of Lands’ End. And while the creditors believe a lawsuit could garner them millions, the question is what exactly do they think they can actually prove. ESL has said that all past deals were transacted with the advice of legal and financial advisors on both sides, as well as approval of Sears’ board. The current bid has earmarked a valuation of $35 million in cash for a waiver of claims – the release – against both Lampert and ESL.
Creditors are said to be haggling with Lampert about those legal claims, and there seems to be a possibility that Lampert might have to raise his bid again if he wants to bail Sears out of bankruptcy just like he did with Kmart Corp. in 2003. A year after Lampert bailed out Kmart to form Kmart Holding Corp., he engineered the merger of Kmart and Sears, Roebuck & Co. to form Sears Holdings Corp. in 2005.
While it can’t be determined whether Lampert will be successful, the fact that negotiations are ongoing means that at least Sears has a chance to stay alive, even if it becomes a smaller retail entity of slightly more than 425 stores under the Kmart and Sears nameplates. Liquidators are still in the picture, but the talks and efforts of negotiators have been centered on trying to hammer out a deal.
The advantage of having Lampert be the successful bidder won’t be lost on the bankruptcy court judge. It’s a result that ESL has been hammering on every time it puts forth a new bid, citing how the offer will save 50,000 jobs. And the whole point of a Chapter 11 filing, after all, is to try to give a debtor a second lease on life through a restructuring of the company.
While some critics can argue there’s no need for a Kmart or Sears anymore, the fact remains that the retailer still does roughly $10 billion in annual volume. Finding some way for a compromise–presuming Lampert is willing to part with more cash–isn’t just about keeping 50,000 jobs alive. A restructured Sears will have an impact on the vendors who sell to Sears. They will have another account they can sell to, and the other companies that make up the supply chain won’t have to scramble to find new business to make up for the loss of Sears orders.