The neverending saga of the world’s longest melting ice cube, that of Sears Holdings which has flirted with bankruptcy for years only to get bailed out in the 11th hour by its biggest investor and CEO Eddie Lampert each and every time, is finally coming to its logical end.
With its stock crashing to a new all time low, and with a $134 million in debt due on Monday on a bond issue that is currently yielding over 1,000% in the 3 or so business days left to maturity…
… the iconic if cash-strapped Sears Holdings, whose predecessor was the de facto originator of “online” retail with its innovative mail order catalogues, and which has been losing money for years, has hired M-III Partners to prepare a bankruptcy filing that could come as soon as this week, the WSJ reported citing people familiar with the situation, as the cash-strapped company that once dominated American retailing faces a debt payment deadline.
The WSJ reports that employees at M-III Partners, a boutique advisory firm, have spent the past few weeks working on the potential filing, with M-III staff seen at the retailer’s headquarters in Hoffman Estates, Illinois. That said, a Chapter 11 may still be avoided as Sears “continues to discuss other options and could still avert an in-court restructuring.”
Furthermore, Eddie Lampert, the hedge-fund manager who is Sears’s chairman, chief executive, largest shareholder and biggest creditor, may once again simply rescue the company, as he has done on many occasions in the past by making the payment. What’s different this time, is that 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. Said otherwise, Lampert hopes to shrink Sears back to profitability with the company already closing hundreds of stores in recent years.
Unfortunately for the billionaire, a key stakeholder group is resisting efforts to continue business as usual: as a result of the company’s poor financial performance, its creditors have refused to support his out of court restructuring plan, which would leave bankruptcy as the only option.
One can’t exactly blame the company’s lenders for being skeptical: Sears has lost more than $11 billion 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.
Desperate to avoid losing control of the company which he bought out of bankruptcy in 2005, Lampert – who in 2003 was kidnapped from the parking lot of his Greenwich office, but was able to persuade his captors to let him go after two days of captivity – has also sought advice, or perhaps magic, from distressed consulting firm AlixPartners, lawyers at Weil, Gotshal and Lazard, as he has tried to keep the company afloat and restructure out of bankruptcy court.
Another hint that a bankruptcy now appears inevitable is that on Tuesday, Sears added restructuring expert Alan Carr as a director, expanding the six-person board to seven.
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.
As the WSJ puts it, Lampert, who was “once hailed as a genius investor for smart bets he made on AutoZone and AutoNation,” met his match in Sears, Roebuck. The retailer was struggling before he combined it with Kmart, which he rescued from bankruptcy, to create Sears Holdings Corp. in 2005.
While Lampert rushed to cut expenses and close unprofitable stores, the business continued to deteriorate during the recession following the financial crisis, as more purchases were made online and rivals such as Walmart and Amazon grew stronger. Not helping was 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 the WSJ, Lampert wants to restructure Sears without filing for bankruptcy protection, because he views bankruptcy as risky for retailers who often enter Chapter 11 bankruptcy with the hope of restructuring but wind up in Chapter 7 liquidation instead, as was the case this year with Toys “R” Us Inc. More realistically, Lampert does not want cede equity control to the company’s creditors, which would be the most likely outcome in court.
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.
And while critics have accused Lampert of stripping assets from the insolvent company, Lampert claims he has been selling assets to give Sears the cash it needs to stay in business, i.e., avoiding handing over equity control.
As for those who have never heard of M-III Partners, it was founded by turnaround expert Mohsin Meghji, who in 2011 quit Loughlin Meghji to start his own company after working on restructurings for nearly 30 years. Sears, which still has nearly 900 stores if not for long, 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.
To be sure, none of the above will come as a surprise to anyone as Sears shares, which traded as high as $144 over a decade ago, closed Tuesday at 59 cents, confirming that investors were aware that a potential bankruptcy filing or restructuring is imminent. If there is one shared feeling among the various stakeholders, it is probably relief that the world’s most drawn out insolvency – on par with that of Greece – is finally coming to an end.
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