SHLDQ - Sears Holdings Corp

[gr33ngi4nt]

http://blog.searsholdings.com/shc-updates/the-truth-about-sears-canada-what-the-new-york-post-failed-to-tell-its-readers/

 

"The Sept. 26 article by James Covert regarding Sears Canada is premised on a complete falsehood.  Given the inaccurate and severely one-sided reporting, Sears Holdings has to publicly set the record straight.

 

Let us be very clear: Sears Canada has NOT reached out to restructuring advisers. "

[Luke 532]

http://blog.searsholdings.com/shc-updates/the-truth-about-sears-canada-what-the-new-york-post-failed-to-tell-its-readers/

 

"The Sept. 26 article by James Covert regarding Sears Canada is premised on a complete falsehood.  Given the inaccurate and severely one-sided reporting, Sears Holdings has to publicly set the record straight.

 

Let us be very clear: Sears Canada has NOT reached out to restructuring advisers. "

 

The New York Post has always been a popular tabloid magazine.

[krazeenyc]

So $400M Loan

 

Eddie Lamper $325M

PYOF $50M

Fairholme $25M

[wisdom]

Fairholme is getting more involved with SHLD - first the Director and now participating in this short term financing.

[merkhet]

Berkowitz must feel like a piñata right now. He gets whacked with Sears Holdings and the Sears Loan. He finally gets to participate in the loan, and he's whacked again by Fannie & Freddie.

[merkhet]

http://www.cnbc.com/id/102052874

 

Oct 2 (Reuters) - Struggling Sears Holdings Corp said it would raise up to $380 million by selling most of its stake in Sears Canada Inc through a rights issue, generating liquidity ahead of the crucial holiday shopping season.

 

Sears Holdings, which holds a 51 percent stake in its beleaguered Canadian unit, will sell 40 million shares of Sears Canada, leaving it with a stake of about 12 percent.

 

Shareholders of Sears Holdings will have the right to buy one share of Sears Canada for each share held, at a price of C$10.60 per share.

 

Sears Canada's shares closed at C$11.12 on the Toronto Stock Exchange on Wednesday.

 

The rights will be issued to Sears Holdings shareholders on record as of Oct. 20. Sears Canada will also apply for a Nasdaq listing.

 

Sears Holdings said Chief Executive Edward Lampert and his investment firm would exercise their rights, raising at least $168 million by mid to late October.

[TwoCitiesCapital]

http://www.cnbc.com/id/102052874

 

Oct 2 (Reuters) - Struggling Sears Holdings Corp said it would raise up to $380 million by selling most of its stake in Sears Canada Inc through a rights issue, generating liquidity ahead of the crucial holiday shopping season.

 

Sears Holdings, which holds a 51 percent stake in its beleaguered Canadian unit, will sell 40 million shares of Sears Canada, leaving it with a stake of about 12 percent.

 

Shareholders of Sears Holdings will have the right to buy one share of Sears Canada for each share held, at a price of C$10.60 per share.

 

Sears Canada's shares closed at C$11.12 on the Toronto Stock Exchange on Wednesday.

 

The rights will be issued to Sears Holdings shareholders on record as of Oct. 20. Sears Canada will also apply for a Nasdaq listing.

 

Sears Holdings said Chief Executive Edward Lampert and his investment firm would exercise their rights, raising at least $168 million by mid to late October.

 

These kinds of rights issues always bother me. "Give us more money so you can own the asset that you already own."

[Sullivcd]

Why a rights offering instead of a spin-off?

[Luke 532]

Why a rights offering instead of a spin-off?

 

It's already a separate company.

[BargainValueHunter]

How much of SCC will Fairholme control?

[BTShine]

They could distribute the shares of SCC to all SHLD shareholders.  It's clear they need cash and are doing this for the cash.

[jeffmori7]

So, will you exercise your rights?

[Kraven]

I don't know why, but for some reason this rights offering reminds me of an old Norm MacDonald line from when he was the Weekend Update anchor on Saturday Night Live:

 

"Kenny G has a Christmas album out this year. Hey, happy birthday, Jesus! Hope you like crap!"

[peridotcapital]

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

[plato1976]

As I said, SHLD is the mother of all wishful thinking I have ever seen

I wouldn't buy until a very distressed price appears, likely quite below $10, when I see a clear sign that Eddie throws in the towel

 

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

[abitofvalue]

I love the chutzpah of management to describe this as "generating liquidity".  If these are the liquidity measures that SHLD is taking, what's to stop it from just issuing a bunch of stock in SHLD and calling it generating liquidity (other thank there probably being no demand).  If you think about it, this transaction is a just a secondary offering of Sears Canada shares at a slight discount to current prices.  The fact that they are doing it this way, suggests they couldn't even find a bank to do the sale of SCC as a block trade. 

 

Funding operations by selling assets was bad enough, now SHLD has to resort to raising funds directly from shareholders as there aren't buyers for assets that can still be sold.

[Luke 532]

Attractive Yields Continue to Pull Investors to the Retail Sector

http://nreionline.com/retail/attractive-yields-continue-pull-investors-retail-sector?NL=RET-01&Issue=RET-01_20141002_RET-01_467&sfvc4enews=42&cl=article_1&YM_RID=CPG09000002830881&YM_MID=594

[bobp]

This has a lot of risk in in it doesn't it?

 

At a price of 10.60 it's possible they don't get this done. Sears canada is trading at 10.75 now? The rights won't expire until late Oct, early Nov. That's a lot of time. And there's going to be a ton of sears canada for sale.

 

Although, sears shorts will be short rights. Hmmm.

 

I don't know but this strikes me as an option that could backfire and turn really ugly for sears. I'm surprised sears is up on this other than shorts running to cover.

 

Am I wrong? Is this basically a done deal?

[Kash50]

While everyone is talking about how Eddie is using this rights offering to generate liquidity, no one has mentioned an important point --- Eddie/ESL are going to be the primary source of that liquidity.

 

It is not clear that there were zero buyers for Sears Canada. It is clear that there were zero buyers for Sears Canada at a price that Eddie found attractive. Therefore, Eddie concluded that he would rather by a buyer of Sears Canada himself than a seller at $10. It similar to his decision to buy into SHOS at $15 during the SHOS spin-off. And in SHOS' case, he over subscribed. Let's see what he does here, but if many SHLD holders dont subscribe, this could be another opportunity for increasing his stake in Sears Canada.

 

What is also clear (and I agree with Peridot), is that Eddie is betting the farm on the transformation/SYW. Otherwise you would see these liquidity moves resulting in capital being returned to shareholders (rather than to fund SHLD's cash burn). However, it would be one sign if he was doing this one from the position of his original $800mm bond investment in KMart. You could argue he still above water on that original investment and therefore is still gunning for a homerun. But he has not stopped there. He has been a net seller of everything else over the last 2 years and a net buyer of SHLD, SHOS and now Sears Canada. My rough math comes out that post the Sears Canada spin, ESL will have invested over $650mm since 2012, $400mm of it from Eddie personally. And this doesn't include the LP stakes he has bought personally over the past year. Not a small bet.

 

Now maybe this is a case of throwing good money after bad. And you could argue that no one could foresee 2008 or the massive move to e-commerce. But by 2012, the big trends were much more apparent. And I don't think Eddie is that rich that $400mm is meaningless to him. So either Eddie knows something we don't or he has officially lost his marbles.

 

Disclosure: no SHLD position; long SHOS

[adesigar]

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

 

LOL. Didn't you have Lands End worth Just $6 per share in your calculations? Wouldnt that mean with 500 million back to SHLD we shareholders should have gotten only $100 Million? You don't need to adjust your model I think maybe you need to get a new model.

[BargainValueHunter]

I love the chutzpah of management to describe this as "generating liquidity".  If these are the liquidity measures that SHLD is taking, what's to stop it from just issuing a bunch of stock in SHLD and calling it generating liquidity (other thank there probably being no demand).  If you think about it, this transaction is a just a secondary offering of Sears Canada shares at a slight discount to current prices.  The fact that they are doing it this way, suggests they couldn't even find a bank to do the sale of SCC as a block trade. 

 

Funding operations by selling assets was bad enough, now SHLD has to resort to raising funds directly from shareholders as there aren't buyers for assets that can still be sold.

You'd think Lampert would recognize the best form of liquidity is free cash flow but he apparently thought that starving the stores of working capital wasn't a terrible idea instead.

[peridotcapital]

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

 

LOL. Didn't you have Lands End worth Just $6 per share in your calculations? Wouldnt that mean with 500 million back to SHLD we shareholders should have gotten only $100 Million? You don't need to adjust your model I think maybe you need to get a new model.

 

Yes, I was valuing LE at 6x EBITDA pre-spin, or about $750M. It was spun out at a $950M valuation, so I was off by about $2 per SHLD share (those who held onto it have an even more valuable stake today).

 

That has nothing to do with the fact that SHLD shareholders who plan to sell the rights in the open market are getting $0.50 per share (based on today's prices) for more than 75% of their SCC stake. If one was valuing the SCC stake at the prevailing market price (assuming a sale to a third party with no premium), then their margin of safety in SHLD has eroded.

[adesigar]

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

 

LOL. Didn't you have Lands End worth Just $6 per share in your calculations? Wouldnt that mean with 500 million back to SHLD we shareholders should have gotten only $100 Million? You don't need to adjust your model I think maybe you need to get a new model.

 

Yes, I was valuing LE at 6x EBITDA pre-spin, or about $750M. It was spun out at a $950M valuation, so I was off by about $2 per SHLD share (those who held onto it have an even more valuable stake today).

 

That has nothing to do with the fact that SHLD shareholders who plan to sell the rights in the open market are getting $0.50 per share (based on today's prices) for more than 75% of their SCC stake. If one was valuing the SCC stake at the prevailing market price (assuming a sale to a third party with no premium), then their margin of safety in SHLD has eroded.

 

Nope I seem to remember $6 per share and then the value had to be reduced by whatever was paid back to SHLD. Id say it was a lot more than $2 per share. I'll look it up.

 

[peridotcapital]

This rights offering, coupled with the LE spin, shows very clearly why sum of the parts valuations don't always work when the company is not going to actually sell all of its parts. LE raised $1.45B but only $950M went directly to shareholders (with $500M kept at SHLD and now gone). The Sears Canada stake trades for $4.75 per SHLD share on the exchange, but now you will be getting rights worth about $0.50 per share instead. The remaining $4.25 will stay at SHLD and be gone quickly. So just between those two assets, a sum of the parts valuation would have overstated realized shareholder value by about $9 per share. Eddie is doubling down on the transformation, unilaterally, by using assets that are in better shape than the core U.S. retail business. Looks like I'll be adjusting my SHLD model lower yet again. Yikes.

 

LOL. Didn't you have Lands End worth Just $6 per share in your calculations? Wouldnt that mean with 500 million back to SHLD we shareholders should have gotten only $100 Million? You don't need to adjust your model I think maybe you need to get a new model.

 

Yes, I was valuing LE at 6x EBITDA pre-spin, or about $750M. It was spun out at a $950M valuation, so I was off by about $2 per SHLD share (those who held onto it have an even more valuable stake today).

 

That has nothing to do with the fact that SHLD shareholders who plan to sell the rights in the open market are getting $0.50 per share (based on today's prices) for more than 75% of their SCC stake. If one was valuing the SCC stake at the prevailing market price (assuming a sale to a third party with no premium), then their margin of safety in SHLD has eroded.

 

Nope I seem to remember $6 per share and then the value had to be reduced by whatever was paid back to SHLD. Id say it was a lot more than $2 per share. I'll look it up.

 

I remember the conversation... I was using a 6x EBITDA multiple and many others were saying that was too low. I gave the example of EXPR and ANN being retailer comps and others were using wholesaler comps like VFC and COLM. It's trading at 10x EBITDA today, so hopefully those same folks held onto their LE shares. I was definitely wrong.

 

I can't imagine I postulated that LE equity was only worth $100M or ~$1 per SHLD share. That would have meant the stock would trade for ~$3 per share post-spin.

 

At any rate, I'd love to hear why you think my take on the SCC rights offering is off base, to get back on topic.

[adesigar]

Found these  I mixed up the $6 per share from one post and the reducing amount of dividend from the other post. Memory not as good as it once was.

 

Not that anybody cares, but at the current price of $44 here's the way I look at it.  I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face (he can extract value via spinoffs, monetizing real estate, and all the stuff we've been discussing on this thread).  So, $4 of downside (yes, I'm well aware that the stock could trade below $40) vs. an upside we can't even calculate.  I know some disagree but I believe the fact that we can't quantify the max upside is a good thing.  I'm not saying I agree with any of the following valuations, but let's look at the risk/reward odds based on what you might think SHLD is worth.  The "At $XX" is the amount you think SHLD is worth.

 

At $60 it's 4:1 ratio in your favor ($16 upside vs $4 downside)

At $80 it's 9:1

At $100 it's 14:1

At $150 it's 26:1

...and so on.

 

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

 

AND

 

Full HY KKR as expected:

 

"a Term Loan Facility of approximately $500 million. We expect that the proceeds of the Term Loan Facility will be used to pay a dividend to Sears Holdings immediately "

 

 

Any views on a scenario where Eddie loads a HY debt structure (say 4-5x EBITDA, 3-4x Interest coverage) on the LE spin and dividends 400-500MM back to SHLD?

 

Offsets 4-5 years of EBITDA lost from LE spin and then used to solve the last sulg of 2014 pension funding.

 

Aggressive use of CF to then pay-down LE debt.  Assumes EBITDA has troughed.

 

"In connection with the spin-off, we may incur material indebtedness. Any such indebtedness would be described in an amendment to this information statement."

 

 

Good call! I was modeling $200-300M but you nailed it. 4x leverage seems high to me, but not egregiously so. 

 

Of course, this means LE equity is likely going to trade at a market cap of ~$300M (I'm assuming an EV/EBITDA multiple of 6-7x), so only about $3 per SHLD share, as opposed to some on this thread who pegged it at $10-$12 and Baker Street as high as $15.

Depending on your views, you could say that keeping $500M within SHLD would be better for current SHLD shareholders than getting another $5/share of LE stock. On the other hand, it really depends on what Eddie does with this $500M. If it just funds the retail transformation than you might wish you had $8 of LE stock instead of $3.