Tuesday, October 16, 2018

The Sears bankruptcy and asset stripping

I have blogged several times in the recent past about asset stripping and corporate conflicts of interest. Sample this, this, this and this

The latest is Sears, the original big retailer, mail-order catalogs to brick-and-mortar chain, which has today filed for bankruptcy under Chapter 11 in the US. 

The company, formed in 1886, and was most recently purchased by hedge fund  owner Edward Lampert in a $11 bn deal in 2005 and merged with Kmart, which he already owned, has since seen its market capitalisation fall from nearly $30 bn to around $40 million. The bankruptcy trigger was a default on a $134 million debt repayment. If liquidated, the company will end up laying-off its 68,000 workers.

The dominant narrative in the post-mortems that will invariably follow will be that of a company which was slow to innovate and which was among those disrupted by the Amazon juggernaut. While these were undoubted contributory factors, a potentially equally important contributor appears to have been the financial engineering asset stripping practices employed by its billionaire owner. Sample this,
He has spun numerous assets off from the retailer into separate companies that his hedge fund invests in. As many of these spinoffs flourished, Sears slid toward insolvency. Over the past five years, the company lost about $5.8 billion; over the past decade, it shut more than 1,000 stores. Many of the 700 stores that remain have frequent clearance sales, empty shelves and handwritten signs... Its total bank and bond debt stood at about $5.6 billion in late September... Sears remains a publicly traded company, but Mr. Lampert exerts an enormous amount of control. He orchestrated a series of deals that generated cash for Sears in the near term, but sold off many of the company’s most valuable assets — creating entities that he also has a stake in. Sears’ shares, which topped $120 as recently as 2007, closed on Friday at 40.7 cents. Sears spun off Lands’ End, the preppy clothing brand, into a separate company, which Mr. Lampert’s hedge fund took a large stake in. The market value of Lands’ End now dwarfs that of Sears. In 2015, Sears sold off stores worth $2.7 billion to a real estate company called Seritage. Mr. Lampert is a big investor in that company as well as its chairman. Seritage is converting many of the best locations into luxury offices, restaurants and apartments. Mr. Lampert is also seeking to buy the Kenmore brand from Sears for $400 million. Even in bankruptcy, Mr. Lampert will have great sway over the company’s fate. His hedge fund owns about 40 percent of the company’s debt, including about $1.1 billion in loans secured by Sears and Kmart properties. As a result, he could force Sears to sell the stores or transfer them to him to repay that debt. “Lampert will make out,” said Mr. Olbrysh, the retired Sears worker. “There is no question about that.”
These practices are perfect examples of asset-tripping. I struggle to understand why this is not criminal misconduct. In any case, given the pervasive nature of such practices, especially in the private market, it is imperative that some very strong prohibitive action be initiated to rein in such stigmatised capitalism before the whole house is brought down by one of such failures. But how can we shape expectations given that the regulators chickened-out when faced with indicting Goldman Sachs for its infamous Abacus engineering.  

In simple terms, as Sears slid down the bankruptcy path, Lampert was busy enriching himself! And one of Lampert's partners in this process and one-time Yale-roommate was one Mr Steven Mnuchin, the current US Treasury Secretary!

Update 1 (17.10.2018)

An FT columnist writes,
Mr Lampert’s commitment to Sears seems genuine.

Update 2 (18.10.2018)

More here
Many Wall Street analysts and investors have speculated that Mr. Lampert’s primary interest in Sears was its real estate. The retailer had hundreds of stores in prime malls and shopping plazas across the United States. These properties could be sold to more profitable retailers or become something else entirely, like movie theaters, condominiums or offices. That was the idea behind Seritage Growth Properties, a publicly traded real estate company Mr. Lampert helped to establish in 2015 to acquire 235 stores from Sears. ESL invested $745 million, and Mr. Lampert became Seritage’s chairman. Its share price has soared 45 percent since its initial public offering and prominent investors like Warren E. Buffett have bought into the company. Mr. Lampert’s stake in this business is now worth approximately $1.1 billion.
Also this

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