Sears Files For Chapter 11 Bankruptcy Protection

by Ike Obudulu Posted on October 15th, 2018

White Plains, New York, USA : Sears Holdings Corporation filed early Monday for bankruptcy protection from creditors, marking the collapse of a company that dominated American retailing for much of the 20th century.

The retailer, which sought chapter 11 protection in U.S. Bankruptcy Court in White Plains, N.Y., reached a deal with its lenders that will allow the 125-year-old company to keep hundreds of its stores open for now.

Sears is expected to close at least 150 stores immediately, according to people familiar with the matter

The Chapter 11 filing to reorganize debts of the parent of Sears, Roebuck and Co and Kmart Corp follows a decade of revenue declines, hundreds of store closures, and years of deals by billionaire Chief Executive Officer Eddie Lampert in an attempt to turn around the company he bought in 2004.

Lampert had pledged to restore Sears to its glory days, when it owned the tallest building in the world and companies that included a radio station and Allstate insurance.

But the company has not turned a profit since 2011, and critics say Lampert let the stores deteriorate over the years, even as he bought the company’s stock and lent it money. It has sold off the legendary Craftsman brand and is considering an offer from Lampert for the Kenmore appliance name.

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 stripped out many of the company’s most valuable assets — often selling them to companies 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. Lands’ End market value 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.”

The company listed $6.9 billion in assets and $11.3 billion in liabilities in documents filed in the U.S. Bankruptcy Court in the Southern District of New York.

The bankruptcy filing was sparked by a standoff between Lampert, the company’s biggest shareholder and lender, and a special board committee, over a rescue plan proposed by Lampert.

Shareholders generally lose their investment when a company files for bankruptcy, and the fate of Sears itself will depend on the willingness of creditors and suppliers to keep the company afloat.

The largest U.S. toy retailer, Toys ‘R’ Us, tried to emerge from its 2017 bankruptcy filing but was forced to liquidate six months later after creditors lost confidence in its turnaround plan.

Shares in Illinois-based Sears closed at about 41 cents on Friday, down from over $100 in the years after hedge-fund star Lampert, once hailed as another Warren Buffett, merged it with discount store Kmart in a $11 billion deal in 2005.

Sears dates back to the late 1880s and its mail-order catalogues with merchandise from toys, medicine and gramophones to automobiles, kit houses and tombstones made it the Amazon.com Inc of its time.

Chicago’s Sears Tower was the world’s tallest building when it was completed in 1973, but in the following decades consumers increasingly turned to e-commerce and brick-and-mortar rivals such as Walmart Inc and Target Corp.

By the 1990s, Sears was struggling to find its place. Walmart was plopping its super centers across the United States. Home Depot was taking away market share on appliances and power tools, but Sears had valuable brands like Kenmore, DieHard and Lands’ End, and stores in prime locations.

Things changed dramatically when Mr. Lampert arrived on the scene.

A hedge fund manager, who got his start at Goldman Sachs and had little experience running a large retail chain, Mr. Lampert took control of Kmart after it came out of bankruptcy in 2003 and then acquired Sears a year later. The company’s board came to be dominated by other wealthy investors, including Steven Mnuchin, the current Treasury secretary who had been Mr. Lampert’s roommate at Yale.

Mr. Lampert says his strategy was to move the company away from its brick-and-mortar legacy into the digital era.

His plan was to use the money saved from closing stores and selling off assets to reinvest in the business. But the company never gained traction online.

Lampert and his hedge fund ESL Investments Inc own just shy of 50 percent of Sears’ shares and are its biggest creditor, with about $2.5 billion owed to the executive and funds he controls.

One of the lingering questions for investors has revolved around the value of Sears’ assets, which include prime real estate.

The company sold 235 of its best stores for $2.7 billion to a Lampert-created company, Seritage Growth Properties. Lampert also became Land’s End Inc’s biggest shareholder when the clothing manufacturer was spun out of Sears in 2014.

Those deals could be subjected to new scrutiny by Sears’ creditors in bankruptcy court.

“When you go into a bankruptcy, you’re living in a fish bowl and every transaction will be looked at and examined,” said Corali Lopez-Castro, Managing Partner at law firm Kozyak Tropin & Throckmorton.

In an earlier attempt to avoid bankruptcy, Sears last year sold its Craftsman tool brand to power tool maker Stanley Black & Decker for $900 million. It also signed a deal to sell Kenmore appliances on Amazon.com.

As many as 100,000 retired Sears employees still receive pensions, which are expected to emerge largely unscathed in the bankruptcy. As the company was bleeding cash and selling off assets in recent years, federal regulators required Mr. Lampert to inject cash into the pension plan. Other benefits for retirees like life insurance, however, could be in danger.

“It is sad to see the company you really loved go down the tubes,” said Ron Olbrysh, 77, who worked in Sears’ legal department for 24 years and now heads an association of retired workers.

The company’s decline has also exacted a toll on its workers. Peggy Mitchell, 55, who works full time unloading delivery trucks at the Sears in Chicago Ridge, Ill., said she barely makes enough to make ends meet.

Ms. Mitchell, who has four children, earns $10.75 an hour and cannot afford the company’s health plan. “Walmart pays more than that,” she said.

EARLIER : Sears On Brink Of Bankruptcy

Sears Holdings Corporation SHLD which was once the largest retailer in the world, is now reportedly facing bankruptcy. After 125 years in business, Sears has contacted banks to arrange the financing necessary to file for bankruptcy.

Sears has hired M-III Partners LLC to prepare a bankruptcy filing that could come as soon as this week, according to people familiar with the situation, as the cash-strapped company that once dominated American retailing faces a debt payment deadline.

Employees at M-III Partners, a boutique advisory firm, have spent the past few weeks working on the potential filing, the people said. In recent days, M-III staff have been at the retailer’s headquarters in Hoffman Estates, Ill., one person said. Sears continues to discuss other options and could still avert an in-court restructuring, the people added.

Sears, which has been losing money for years, has $134 million in debt due on Monday. Edward Lampert, the hedge-fund manager who is Sears’s chairman, chief executive, largest shareholder and biggest creditor, could rescue the company, as he has done in the past by making the payment.

But Mr. Lampert is pushing for a broader restructuring that would include shaving more than $1 billion from Sears’s $5.5 billion debt load, selling another $1.5 billion of real estate and divesting $1.75 billion of assets, including the Kenmore appliance brand, which he has offered $400 million to buy himself.

The company’s poor financial performance has made it difficult to get support from lenders for the plan, one of the people said. Mr. Lampert hopes to shrink Sears back to profitability, this person said. The company has already closed hundreds of stores in recent years.

Sears has more than $11 billion in cumulative losses since 2011, and its annual sales have dropped nearly 60% in that period to $16.7 billion. Analysts say it needs to raise more than $1 billion a year to stay afloat.

Mr. Lampert has also sought advice from consulting firm AlixPartners; lawyers at Weil, Gotshal & Manges LLP; and investment bank Lazard Ltd., as he tried to keep the company afloat and restructure out of

On Tuesday, Sears added restructuring expert Alan Carr as a director, expanding the six-person board to seven. Mr. Carr runs a restructuring advisory firm and previously worked as a restructuring lawyer at Skadden, Arps, Slate, Meagher & Flom LLP. He has also served on the board of companies—including wireless-networking business LightSquared Inc. and guitar maker Gibson Brands Inc.—that have recently navigated the bankruptcy process.

Once hailed as a genius investor for smart bets he made on AutoZone and AutoNation , Mr. Lampert met his match in Sears, Roebuck & Co. The retailer was struggling before he combined it with Kmart, which he rescued from bankruptcy, to create Sears Holdings Corp. in 2005.

He moved quickly to cut expenses and close unprofitable stores. But the business worsened coming out of the recession, as more purchases were made online and rivals such as Walmart Inc. and Amazon.com Inc. grew stronger. The company wasn’t helped by Mr. Lampert’s unconventional approach to retailing. He resisted investing in store upgrades and, after becoming CEO in 2013, managed the company from Florida, according to people familiar with the situation.

Mr. Lampert wants to restructure Sears’s debt without filing for bankruptcy protection, because he views bankruptcy as risky for retailers, according to a person familiar with his thinking. Retailers often enter bankruptcy with the hope of restructuring but wind up liquidating instead, as was the case this year with Toys “R” Us Inc., this person said.

Mr. Lampert, whose hedge fund ESL Investments Inc. owns a majority of Sears shares, also believes the company can get more value for its assets by selling them while it is a going concern, this person added.

Critics have accused Mr. Lampert of stripping assets from the beleaguered company. The person familiar with Mr. Lampert’s thinking said he has been selling assets to give Sears the cash it needs to stay in business.

While M-III Partners itself is relatively new to the restructuring industry, its founder, Mohsin Meghji, is considered a turnaround expert. The former Arthur Andersen consultant and co-founder of another boutique advisory firm has been working on restructurings for nearly 30 years.

Sears, which still has nearly 900 stores, would be M-III’s biggest assignment. It recently served as chief restructuring officer of Real Alloy, an aluminum recycling company that sought bankruptcy protection in 2017.

Shares of Sears, which traded as high as $144 over a decade ago, closed Tuesday at 59 cents, a sign that investors are bracing for a potential bankruptcy filing or restructuring.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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