Edward Lampert's $5 Billion Sears Rescue Under Scrutiny as Auction Nears
7:02 pm ET January 11, 2019 (Dow Jones) Print
By Soma Biswas, Peg Brickley and Lillian Rizzo
Billionaire Edward Lampert's sweetened $5 billion offer for Sears Holdings Corp. is less than meets the eye, but it may be good enough to keep the 126-year-old retailer from being pulled apart in bankruptcy.
Sears filed for chapter 11 bankruptcy in October, and is headed toward an auction Monday that will pit Mr. Lampert, the chairman of Sears and the founder of ESL Investments, against Abacus Advisory Group LLC, a liquidator that has offered to clear the stores of inventory.
The retailer's board rejected Mr. Lampert's first rescue offer, but he came back this week with a deal that he says is more than $600 million richer.
He added no new cash, asked for more real estate and other goods and beefed up promises to take on bills owed to suppliers, landlords, tax authorities and others.
"He may be saying, 'I'm giving $1 of cash and you give me assets worth $1.10,'" said David Wander, a lawyer at Davidoff Hutcher & Citron LLP who represents a Sears supplier.
Heading into the weekend, there is still no sign of an agreement between Mr. Lampert and the official committee of unsecured creditors, a body that has threatened to challenge $1.3 billion of his bid. Some members of the committee have urged liquidation as the best answer for Sears, and the committee has said it would object to a $1.3 billion "credit-bid" portion of Mr. Lampert's offer, which is being submitted through his ESL Investments hedge fund.
Much of the $600 million in additional Sears liabilities Mr. Lampert has agreed to take on is linked to the new assets he is buying.
"Assumption of those obligations doesn't mean they'll actually be paid. There's a risk that ESL would be unable or unwilling to pay those bills, " said Jeffrey Schwartz, a lawyer at McKool Smith, which represents two Sears vendors.
Representatives for Sears and the creditors committee weren't available for comment. A spokesman for ESL declined to comment.
ESL is Sears's largest creditor, and the hedge-fund manager wants to pay for some of the Sears takeover by canceling debt instead of bidding with its own cash.
The problem with that, according to creditors, is that Mr. Lampert's debt is tainted by improper "sweetheart" deals before bankruptcy. Chief among the alleged suspicious deals is the 2015 transaction that sold hundreds of Sears properties to a new, publicly traded real-estate investment trust, Seritage Growth Properties, for $2.7 billion.
Mr. Lampert is the chairman of Seritage and owns a major stake in it, as well as in Sears. Sears creditors are investigating whether he took advantage of his insider status to build Seritage at Sears's expense, a suspicion he has denied repeatedly.
A Sears shareholder lawsuit that challenged the Seritage transaction settled in 2017, with no admission of wrongdoing by Mr. Lampert, his lawyers noted in court papers.
While Sears weighs Mr. Lampert's bid, lawyers for other big creditors -- mall owners, vendors and the government's pension insurer -- are weighing their chances of beating ESL in a court fight.
Mr. Lampert's latest bid includes $35 million to buy a "release" from creditors, which would protect his right to credit bid in the auction. Creditors may demand more money for the release as negotiations unfold on Monday.
Company officials have to calculate what Sears actually will get from his offer and how much it could make if it instead sold off the real estate and other assets he has earmarked to buy.
However, people involved in the case predict the auction will be held, Mr. Lampert will be there and that he has a good chance of winning.
Opinions are divided about whether Mr. Lampert's offer will really save 50,000 jobs, or how long Sears will survive in the rough retail environment.
Nothing in Mr. Lampert's offer prevents him from continuing to shrink the chain if he wins. Instead of salvation, Sears could be headed toward a slow-motion liquidation that enables Mr. Lampert to take his time cashing out, some people involved in the case believe.
Vendors, landlords and lawyers disagree about Sears's long-term survival prospects, but the judge presiding over the bankruptcy, Robert Drain, has urged Sears to accept a deal that saves the company, according to people familiar with the communications.
There's not a lot of cash for creditors in Mr. Lampert's bid, but his going concern offer improves Sears's chances of paying the essential costs of running a bankruptcy.
Mr. Lampert's revised bid absorbs some significant costs, including up to $139 million of priority vendor claims and $166 million for goods that have been ordered but are still sitting in warehouses, easing Sears's worries it will leave more unpaid bills behind after exiting bankruptcy.
Mr. Lampert's pledge to pay those bills should put some vendors minds at ease, said Mr. Wander of Davidoff Hutcher.
Write to Soma Biswas at firstname.lastname@example.org, Peg Brickley at email@example.com and Lillian Rizzo at Lillian.Rizzo@wsj.com
(END) Dow Jones Newswires
January 11, 2019 19:02 ET (00:02 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.