Published On: Tue, Nov 26th, 2013

Edward Lampert’s Plan To Re-Organize Sears Begins To Take Shape

Lampert had his work cut out to turn the ailing department chain’s fortunes around when he took over the post of CEO earlier this year – now the buck stops with him.

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Edward S. “Eddie” Lampert / Getty

Giant American retailer Sears Holdings is selling some more of the family silver up in Canada, with five major Sears stores in its Canadian subsidiary now just reported sold to developer Cadillac Fairview Corporation, including the company’s Canadian flagship store situated in Toronto’s famous Eaton Centre. The sale is expected to raise around $400 million. Another eight have already recently been sold as well for $315 million, with the closing of this deal expected early in 2014. Sears Holdings owns 51% of Sears Canada.
The Chairman of Sears Holdings, Edward Lampert, also became operating CEO of the ailing retail giant as well earlier this year in February, when the previous incumbent Louis D’Ambrosio was forced to step down, officially due to family health matters.

Edward Lampert and his hedge fund ESL Investments acquired a controlling interest in what was then Sears Roebuck & Company, in 2005 when it merged with Kmart Holdings and that merged entity took on the new corporate name of Sears Holdings Corp.

Kmart Holdings had previously existed as the Kmart Corporation, which had gone bankrupt in 2002. The company then emerged from bankruptcy in 2003 under the control of Lampert and his hedge fund ESL Investments who had earlier bought the distressed company’s bonds as vulture investors, at a huge discount. This put them in the drivers seat when it came to negotiate with the bankruptcy trustees. Finally, Lampert’s control of Sears Holdings then came about through exchange of his position in Kmart for one in Sears Holdings instead under the merger arrangements.

In the years since, the combined retailing colossus has had a sometimes very rocky time of it in the commercial retail marketplace, and has had a highly volatile share price as well because of it – indeed the trend has been mostly down since 2007.

Many stores have been sold off, real estate assets stripped, managements have come and gone and corporate merchandising plans and business strategies reconfigured on the fly.

To some observers this has all seemed to be, as much as anything, an inherent part of Lampert’s business style of operating. His reputation as an astute investor was formed initially much more as an asset stripper than as a builder, or re-builder, of companies.

The jury is still out on his performance, however, as it was a thankless task he took on in any case to begin with, putting together two such lumbering giants as Sears and Kmart had already long since become. Sometimes merging two cripples is not such a great idea, no matter what the subsequent rescue strategies may be.

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Sears / Getty

In 2012 Sears Holdings also reorganized its Canadian subsidiary Sears Canada, spinning off some of it to its own shareholders and leaving just 51% in its own hands. Sears Holdings had held as much as 92% of this particular subsidiary at one point, which was publicly listed in Canada, but squandered its chances to maximize its flexibility by buying out the rest of the minority in a buy-back offer it made in 2006 when Bill Ackman of Pershing Square got in the way of the move and purchased shares in the market. He bought enough to constitute what was at the time a blocking position, one which he only sold back to them later, in 2010.

After the 2012 spinoff was completed Sears Holdings did indeed end up with 51% of Sears Canada. Also, however, Edward Lampert personally and his hedge fund ESL Investments, as major Sears Holdings shareholders each ended up with 10.2% and 17.4% respectively as well, according to filings made with the Canadian regulatory authority SEDAR.

Sears has been steadily selling of some of the company’s largest stores in Canada, and on October 29th, 2013 announced that another five major stores were being sold to real estate developer the Cadillac Fairview Corporation. These are all in Cadillac Fairview’s malls, including the company’s Canadian flagship store situated in Toronto’s famous Eaton Centre. The deal is expected to raise $400 million for the company. The formal closing date for the transaction was not specified.

Despite the continued sell off of its prime stores in Canada, Lampert has doggedly denied that Sears intends to sell off the entire Canadian division itself, which was rumoured recently in the New York Post. This led Sears Holdings to quickly issue a formal statement on November 25th denying the rumour, and to assert only that:

“Sears Holdings will work with the board and management of Sears Canada with a goal of increasing the value of our 51% interest and realizing significant cash proceeds to support our transformation and to create value for our shareholders.”

As denials go that isn’t the strongest one ever made, one might think, but I suppose death by a thousand cuts as a form of financial engineering may be preferable in some minds to a sudden execution.

The next property sale in Canada to close will be one whereby Sears Canada expects to realize $315 million from a deal to sell of a group of its interests in eight properties in the Province of Quebec. These have been sold to the Montez Income Properties Corporation and the deal is expected to close on January 8, 2014.

Coincidentally or not, on November 19th, 2013, Sears Canada also announced that its Board of Directors declared that an extraordinary common share cash dividend of $509 million will be paid on December 6, 2013. 51% of this money will go to its parent Sears Holdings and another 27.6% directly to Lampert and his hedge fund ESL.

Edward Lampert and ESL Investments have a combined 55.3% control position in Sears Holdings, according to the company’s last proxy filings with the SEC. Lampert owns 31.8% of the position personally, and has voting power over another 23.5% invested through ESL Investments. Curiously this ratio appears to be the opposite of their reported holdings relative to each other in Sears Canada, as noted earlier above.

Today Sears Holdings still has a market capitalization of US$6.8 billion even at its current depressed price of US$63.5 per share, and therefore his holdings form a substantial portion of his own personal net worth, estimated by Forbes to be US$2.9 billion in total as at September 2013. That is an incentive you would think to make it a success.

About Edward Lampert

Edward Lampert was born and raised in New York City. He had a difficult adolescence after his father, a lawyer in New York, passed away at an early age leaving the family without a primary breadwinner.

The young Lampert took on a number of part time jobs after school and on weekends to help his mother support the family. Despite having little spare time, Edward did well at school, developed there as an excellent athlete and went on to study economics at Yale University, graduating in 1984 with a B.A. in Economics.

He began his professional career as an intern at Goldman Sachs, moving on to the firm’s risk arbitrage department – essentially betting on the outcome of takeover battles going on in that era. He remained there for three years before leaving the bank in 1988 with a good grounding in deal-making, in order to form his own investment company, ESL Investments.

Lampert’s aggressive style of investment was well suited to the high paced days of the final decade of the old century, and he enjoyed considerable success – particularly in the years preceding the financial downturn of 2008. Edward Lampert was the first US based financial manager to surpass the magic US$1 billion earnings barrier in a single year in 2004.

Edward Lampert married his wife Kinga in 2001 and they have three children together. They live in Greenwich Connecticut, where they are active members of the local Chabad House.

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