SHLDQ - Sears Holdings Corp

[ERICOPOLY]

The best thing for Berkshire has always been to buy more businesses with the cash -- forever adding to the diverse, individually strong streams of cash flow that form together the mighty Amazon.

 

But Lampert effectively IS buying more businesses with the share repurchase.  Since SHLD already has a handful of businesses under its umbrella when shares are repurchased he is buying a larger concentration of each company within SHLD as his personal holdings increase in ownership percentage. 

 

 

I disagree.  Back in early March 2009 there was somebody on the board that wanted Berkshire to buy more shares back.  I argued that it would be better to buy more WFC instead.  It wasn't just because WFC was more undervalued (it was of course).  The secondary reason if that if shit ever hits the fan, you've got those extra WFC shares on hand that can be quickly sold to shore things up. 

 

Just like paying cash out in a dividend, buying back shares weakens your hand and reduces your financial flexibility.  You need to be damn sure that you are very very strong to be paying cash out.  What about those comments by Eddie that closing stores are good for their bond ratings because they reduce liabilities?  Well, another way to improve your ratings is to have more businesses that spit out cash.  Not to pay out the cash instead! 

 

Buying back shares (at any share price) and paying out dividends (at any share price) are effectively the same thing (taxes aside).  Shareholders who like the price can reinvest their dividends into shares, and shareholders who don't like the price can sell shares to get at the cash. 

 

So there is no use complaining that a company pays dividends instead of buying back shares, and there is no use complaining that shares were bought back at high prices.  These are all within the control of shareholders (taxes aside).  But I do find it valid to say that he could build the cash flows of the company stronger by using cash to buy more streams of income instead of just flushing the cash out to shareholders.  This is how Berkshire continually makes itself stronger.  Where would Berkshire be today if they had only ever bought back shares instead of making it stronger and safer with every purchase of a new company?

[Mephistopheles]

One thing I'd like to reassert is that buying back shares is mathematically identical to paying a dividend where the shareholder reinvests 100% of the dividend in the shares.  Taxes aside.

 

So all this talk about how many shares were bought back...  It's like crowing about how much dividends Coca Cola paid last year.  It doesn't mean shit to knowledgable investors like yourselves who know how best to allocate proceeds from a dividend (well, taxes aside).  What you are left with is less cash in the company (less flexibility), fewer shares matched with that lower flexibility (more leverage), and exactly the same operations.  Works best when the remaining operations are extremely strong.

 

Let's say we have a $10,000,000 company with 10,000,000 shares outstanding ($1/share).  A $500,000 dividend is issued ($0.05/share).  Lampert owns 2,000,000 (ownership is 20%) shares so he receives $100,000 as a dividend.  He reinvests at $1/share and his share count is now 2,100,000.  Ownership is now 21% (up from 20%).

 

On the other hand, let's say they repurchase shares at $1 using that $500,000.  Share count decreases to 9,500,000.  Lampert still owns 2,000,000 shares but now his ownership percentage is 21.05% (instead of 21.00% with dividends reinvested).  I know 0.05% seems insignificant, but why choose 21.00% ownership when you can just as easily choose 21.05%?  I'd certainly take the latter.  And this doesn't even factor in tax advantages, reducing the share count for a potential short squeeze, etc.

 

I believe Lampert cares most about the shareholders that want to hold this for the next few decades, not the shareholders that need cash in their pockets today.  Repurchasing shares instead of issuing dividends attracts the investors he wants in his permanent capital vehicle as it makes the most sense, and provides the most value, on a long-term basis.

 

 

 

Someone correct me if I'm wrong, but I think what you might be missing is that the stock will drop on ex-dividend date by the dividend amount, which is the price you should use for purchasing shares with dividends received. So in your example, the purchase price with dividend proceeds should be $.95/share, not $1.

[ERICOPOLY]

One thing I'd like to reassert is that buying back shares is mathematically identical to paying a dividend where the shareholder reinvests 100% of the dividend in the shares.  Taxes aside.

 

So all this talk about how many shares were bought back...  It's like crowing about how much dividends Coca Cola paid last year.  It doesn't mean shit to knowledgable investors like yourselves who know how best to allocate proceeds from a dividend (well, taxes aside).  What you are left with is less cash in the company (less flexibility), fewer shares matched with that lower flexibility (more leverage), and exactly the same operations.  Works best when the remaining operations are extremely strong.

 

Let's say we have a $10,000,000 company with 10,000,000 shares outstanding ($1/share).  A $500,000 dividend is issued ($0.05/share).  Lampert owns 2,000,000 (ownership is 20%) shares so he receives $100,000 as a dividend.  He reinvests at $1/share and his share count is now 2,100,000.  Ownership is now 21% (up from 20%).

 

On the other hand, let's say they repurchase shares at $1 using that $500,000.  Share count decreases to 9,500,000.  Lampert still owns 2,000,000 shares but now his ownership percentage is 21.05% (instead of 21.00% with dividends reinvested).  I know 0.05% seems insignificant, but why choose 21.00% ownership when you can just as easily choose 21.05%?  I'd certainly take the latter.  And this doesn't even factor in tax advantages, reducing the share count for a potential short squeeze, etc.

 

I believe Lampert cares most about the shareholders that want to hold this for the next few decades, not the shareholders that need cash in their pockets today.  Repurchasing shares instead of issuing dividends attracts the investors he wants in his permanent capital vehicle as it makes the most sense, and provides the most value, on a long-term basis.

 

 

 

Someone correct me if I'm wrong, but I think what you might be missing is that the stock will drop on ex-dividend date by the dividend amount, which is the price you should use for purchasing shares with dividends received. So in your example, the purchase price with dividend proceeds should be $.95/share, not $1.

 

It's the same dollar of cash deployed.  It the same share bought back for the same price.  Tough to argue that more value is created on one side of the corporate veil versus the other.  Just the logic of it, doesn't pass the test.

[Luke 532]

Announced today...

 

Sears Outlet Store going into old Circuit City building

http://www.bnd.com/2013/08/14/2743793/sears-outlet-store-coming-to-fairview.html

[mcliu]

Most investors do need to pay taxes, so repurchases are more tax-efficient. :) That saves you a pretty big chunk depending on your tax bracket.

[plato1976]

Well, I guess we do have some risk:

 

1. The stores with the most real estate value may happen to be the stores that should be kept for retail purposes

2. The stores that can be closed may actually generate no value when sold , after considering closing costs

3. I still personally think US physical retail has over-capacity. And it will be tough for SHLD to sell its real estate even  if it wants to

 

These risks are in addition to the big risk that Eddie may not be want to shrink at all - he may still want to turn it around in its current size

 

Sounds like I should keep it a small position

 

 

 

One thing I'd like to reassert is that buying back shares is mathematically identical to paying a dividend where the shareholder reinvests 100% of the dividend in the shares.  Taxes aside.

 

So all this talk about how many shares were bought back...  It's like crowing about how much dividends Coca Cola paid last year.  It doesn't mean shit to knowledgable investors like yourselves who know how best to allocate proceeds from a dividend (well, taxes aside).  What you are left with is less cash in the company (less flexibility), fewer shares matched with that lower flexibility (more leverage), and exactly the same operations.  Works best when the remaining operations are extremely strong.

 

Let's say we have a $10,000,000 company with 10,000,000 shares outstanding ($1/share).  A $500,000 dividend is issued ($0.05/share).  Lampert owns 2,000,000 (ownership is 20%) shares so he receives $100,000 as a dividend.  He reinvests at $1/share and his share count is now 2,100,000.  Ownership is now 21% (up from 20%).

 

On the other hand, let's say they repurchase shares at $1 using that $500,000.  Share count decreases to 9,500,000.  Lampert still owns 2,000,000 shares but now his ownership percentage is 21.05% (instead of 21.00% with dividends reinvested).  I know 0.05% seems insignificant, but why choose 21.00% ownership when you can just as easily choose 21.05%?  I'd certainly take the latter.  And this doesn't even factor in tax advantages, reducing the share count for a potential short squeeze, etc.

 

I believe Lampert cares most about the shareholders that want to hold this for the next few decades, not the shareholders that need cash in their pockets today.  Repurchasing shares instead of issuing dividends attracts the investors he wants in his permanent capital vehicle as it makes the most sense, and provides the most value, on a long-term basis.

 

 

 

Someone correct me if I'm wrong, but I think what you might be missing is that the stock will drop on ex-dividend date by the dividend amount, which is the price you should use for purchasing shares with dividends received. So in your example, the purchase price with dividend proceeds should be $.95/share, not $1.

 

It's the same dollar of cash deployed.  It the same share bought back for the same price.  Tough to argue that more value is created on one side of the corporate veil versus the other.  Just the logic of it, doesn't pass the test.

[Luke 532]

One thing I'd like to reassert is that buying back shares is mathematically identical to paying a dividend where the shareholder reinvests 100% of the dividend in the shares.  Taxes aside.

 

So all this talk about how many shares were bought back...  It's like crowing about how much dividends Coca Cola paid last year.  It doesn't mean shit to knowledgable investors like yourselves who know how best to allocate proceeds from a dividend (well, taxes aside).  What you are left with is less cash in the company (less flexibility), fewer shares matched with that lower flexibility (more leverage), and exactly the same operations.  Works best when the remaining operations are extremely strong.

 

Let's say we have a $10,000,000 company with 10,000,000 shares outstanding ($1/share).  A $500,000 dividend is issued ($0.05/share).  Lampert owns 2,000,000 (ownership is 20%) shares so he receives $100,000 as a dividend.  He reinvests at $1/share and his share count is now 2,100,000.  Ownership is now 21% (up from 20%).

 

On the other hand, let's say they repurchase shares at $1 using that $500,000.  Share count decreases to 9,500,000.  Lampert still owns 2,000,000 shares but now his ownership percentage is 21.05% (instead of 21.00% with dividends reinvested).  I know 0.05% seems insignificant, but why choose 21.00% ownership when you can just as easily choose 21.05%?  I'd certainly take the latter.  And this doesn't even factor in tax advantages, reducing the share count for a potential short squeeze, etc.

 

I believe Lampert cares most about the shareholders that want to hold this for the next few decades, not the shareholders that need cash in their pockets today.  Repurchasing shares instead of issuing dividends attracts the investors he wants in his permanent capital vehicle as it makes the most sense, and provides the most value, on a long-term basis.

 

 

 

Someone correct me if I'm wrong, but I think what you might be missing is that the stock will drop on ex-dividend date by the dividend amount, which is the price you should use for purchasing shares with dividends received. So in your example, the purchase price with dividend proceeds should be $.95/share, not $1.

 

It's the same dollar of cash deployed.  It the same share bought back for the same price.  Tough to argue that more value is created on one side of the corporate veil versus the other.  Just the logic of it, doesn't pass the test.

 

True, my math was off.  Thanks for correcting that.  In addition to the tax advantages of buying back instead of a dividend, a bit of game theory comes into play.  With a dividend you attract an entirely new investor to SHLD.  By buying back shares you don't.  If Lampert was trying to gain as much control as he could of the company he wouldn't necessarily want the dividend ETF's to jump on board.  Just a thought.

[ERICOPOLY]

Most investors do need to pay taxes, so repurchases are more tax-efficient. :) That saves you a pretty big chunk depending on your tax bracket.

 

That's why I strongly desire all companies to never pay dividends, and always buy back shares.  No matter what the price of the stock!

 

I had to bring up the topic in this thread because I could see people getting sucked into the "magic" of IV growing from buying back shares.  No more magical than when KO pays a dividend and you are enrolled in the DRIP! 

 

[Luke 532]

Level with me here man. I'm playing devils advocate with everyone because I think that helps us think clearly, and make better investment choices. Don't take anything I write here as inflammatory or personal. I'm a shareholder for many years in SHLD and agree with your underlying concept but I would like to challenge them and find holes to see if they can be plugged.

 

I understand.  It's more prudent to focus on the bearish thesis if you're long, and vice versa.  I get that, and it's one reason why I love this message board.

 

I'd like to tell you I've found a way to kill the company. I know everyone believes that this is just not possible because Bruce Berkowitz said so. And they buy more shares. But theres actually one really good way I can see this company getting killed and its that the reputation of Sears remains negative among the public. The stores continue to look bad, the merchandise doesn't sell, and less people visit the stores. Each quarter the same store sales go down, the customer traffic declines, less people return. More of the customer base dies. Eventually they can't keep up with the decline and the stores have to be closed faster, some at even a loss to the overall 'network' effect of having a store in the community go away.

 

The reputation of Sears may be dying but I think it is very important to note that the reputations of Kenmore, Craftsman, DieHard, Lands' End, and now ShopYourWay are strong.  KCD are all top-of-the-line.  ShopYourWay has become the #3 online retailer ahead of WalMart.com, Target.com, and others.  It's prudent, in my view, to look at this investment at Sears Holdings instead of just Sears.

 

Yes its true. The company can die. It can be a slower version of JCP too if ESL starts investing in store upgrades, a 'store within a store' model he earlier was a fan of. He could just wind up in the same position as JCP even if it takes longer and isn't so dramatic. The company can wind up in bankruptcy or worse, just spend a decade getting worse before its too late for any of us to see the thesis play out.

 

What indication do we have that ESL will invest in store upgrades?  I know you're just playing devil's advocate and it's healthy to discuss the "what-ifs" but that is something that if we see him doing it then we'll evaluate it then.

 

I think extrapolation bias is a powerful thing.  Just because Lampert has had SHLD for 10 years doesn't mean he doesn't have huge plans that are unfolding right now.  And we experienced one of the worst recessions in history in the middle of it... that will throw a monkey wrench in anybody's plans.  The hiring of Lukes and Schriesheim went largely unnoticed but those guys are studs.  You don't hire them if you're not making a significant move that aligns with your plans.  When did UbiquityCE.com website go live - a few months ago?  Stuff is shaping up that he is not going to be dormant for the next 10 years.

 

Bankruptcy; Lampert has done a great job of putting some excellent assets under non-guarantor subsidiaries; KCD, 125 'crown jewel' properties, etc.  Of course, if they declare bankruptcy the stock would obviously plummet regardless of the assets that are the ownership of shareholders and not bondholders (as are the non-guarantor subs).

 

As for buying all those parts of the company at ZERO cost. Listening to that sounds great but you ignored the elephant in the room. This is like saying you want to buy into Google because they are the future of self driving cars and wearable tech. You can even argue they are spending such little money on those pieces of the future too. In fact it doesnt move the dial. If/when wearable tech is available, Google may not be the benefactor or take a lot of marketshare. They proved that with Android, its the market leader but makes little money for them. ShopYourWay may not even make them any money. You also have to attach that to the overall company which is many many times greater. We are talking 40bn a year sales to Seritage/a few pieces that look promising to you? I always look to tech blogs that showcase Google products and launches as being significant when in truth their money is made in something very bread/butter. Its advertising. For Sears it isn't going to be a real estate venture, its going to be same store sales, sales per square foot, customer traffic, online sales.

 

How is it like buying Google because they are the future of self-driving cars?  SHLD already has companies within its fold that are significant.  Kenmore, Craftsman, DieHard are top-of-the-line.  And something like real estate can't be compared to a car of the future.  There's only so much big-box space that can be built and there likely won't be much built in the next few years.  Real estate isn't a pipe dream concept that may or may not come to fruition in the future, it's bricks and mortar on the ground today and has real value.

 

With that said, I would agree that ShopYourWay although impressive at #3 already, could turn out to be great or could turn out to be a dud... just depends on whether or not Lampert continues to focus on it or not.  He seems to be investing a lot more in it than in physical stores so I would imagine that will continue.

 

I also have my reservations about the ESL/Buffet Partnership comparison with BRK/SHLD. If ESL is a student of history and I am certain he is, he would know by now that he is literally copying WEB's journey. But if he was aware of what happened to the mills, and how Sears is equally likely to fail as a store, why is he doing this? Is he planning to hold onto the core operation for 10, 20 years and then giving it up? And then he decides to invest in other stuff? ESL isn't a big enough owner to be as concentrated as WEB who owned about 33% of BRK, but if that is the only reason ESL is still running this company, hes made a foolish 10 year bet that he could have fixed by sacking the company and allowing its shares to plunge and he could buy all he wanted and then invest to his hearts content. It makes no sense in the history of BRK that ESL would do the same thing Buffett later lamented.

 

I've always thought Berkshire was showing good sportsmanship with his comments on the textile mill.  If he came out and said "I knew it was going to fail but I wanted to get my hands on all the shares of my partners," that wouldn't come across very well.  Instead, he let the mills operate for 20 years... and it also veiled his efforts in creating the conglomerate we know today.  If Lampert stripped SHLD and sacked it from the beginning, don't you think everybody would realize something's up?  Instead, everybody just thinks he's delusional in trying to save the old Sears.

 

Texual, I hope my rebuttals aren't wrongly received.  I think it's healthy to point out the potential risks, but I think it's equally important to discuss whether or not those risks have a plausible chance of actually happening.

[Luke 532]

Where would Berkshire be today if they had only ever bought back shares instead of making it stronger and safer with every purchase of a new company?

 

To be fair, Buffett did spend a good chunk of money buying back shares in the early days...

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/10/

This is what I recall from reading Snowball.

 

In the early days of Berkshire Buffett used part of the cash he squeezed out of the textile business to repurchase shares.  Buffett first invested in Berkshire in 1962 and assumed control in 1965.  From 1962 to 1975 Berkshire reduced its shares outstanding from about 1.6 million to slightly under 1 million.  Many of the shares were repurchased from Buffett's previous partners.  Warren gave them enough information about the business, but just enough.

 

[Luke 532]

That's why I strongly desire all companies to never pay dividends, and always buy back shares.  No matter what the price of the stock!

 

Except with Bank of America's warrants... get that strike price down with some dividends!  :)

[ERICOPOLY]

That's why I strongly desire all companies to never pay dividends, and always buy back shares.  No matter what the price of the stock!

 

Except with Bank of America's warrants... get that strike price down with some dividends!  :)

 

The warrants effectively lock you in to buying more shares, no matter what the price.  That's what the dividend readjustment provisions are all about.  IMO it's better to own the straight common, levered, and hedge the leverage with puts.  This way you get the cash itself from the dividend and you can spend it where you think the best value is -- not 100% back into BAC.

[Luke 532]

That's why I strongly desire all companies to never pay dividends, and always buy back shares.  No matter what the price of the stock!

 

Except with Bank of America's warrants... get that strike price down with some dividends!  :)

 

The warrants effectively lock you in to buying more shares, no matter what the price.  That's what the dividend readjustment provisions are all about.  IMO it's better to own the straight common, levered, and hedge the leverage with puts.  This way you get the cash itself from the dividend and you can spend it where you think the best value is -- not 100% back into BAC.

 

I've read your comments on the topic over on the BAC thread.  I've never commented on them but I just prefer the warrants over the strategy you laid out.

 

The thing with the dividend knocking the strike price down is that it's much more effective than just using the dividend to buy more common.  Entry price of $3.32 on the warrants when they were trading around $7 or $8 means I get roughly double the benefit of dividends than the common shareholder gets (by investing the same dollar amount initially but acquiring twice as many warrants compared to the number of shares I would have been able to buy).

[ERICOPOLY]

That's why I strongly desire all companies to never pay dividends, and always buy back shares.  No matter what the price of the stock!

 

Except with Bank of America's warrants... get that strike price down with some dividends!  :)

 

The warrants effectively lock you in to buying more shares, no matter what the price.  That's what the dividend readjustment provisions are all about.  IMO it's better to own the straight common, levered, and hedge the leverage with puts.  This way you get the cash itself from the dividend and you can spend it where you think the best value is -- not 100% back into BAC.

 

I've read your comments on the topic over on the BAC thread.  I've never commented on them but I just prefer the warrants over the strategy you laid out.

 

The thing with the dividend knocking the strike price down is that it's much more effective than just using the dividend to buy more common.  Entry price of $3.32 on the warrants when they were trading around $7 or $8 means I get roughly double the benefit of dividends than the common shareholder gets (by investing the same dollar amount initially but acquiring twice as many warrants compared to the number of shares I would have been able to buy).

 

You entered the trade when the common was priced at $7 or $8.  Let's say you instead purchased the common (no leverage).  You would get a capital gain of somewhere between $6.30 and $5.50 per share (up to the $13.30 warrant strike) that the warrant holder will never get.  He gets more dividends, sure, but he bought those dividends with this opportunity cost I just talked about.  Then he gets the potential of leveraged capital gains on the upside, but that's standard fare for anyone taking on so much leverage.

 

The opportunity cost of the leveraged common (vs the warrants) has been simply, in a word, less (at least since that discussion began in March with the stock at $12).  And further down the road when the stock is trading at fair value, the levered common will have the big advantage of flexibility in which share to purchase with the reinvested dividend (why buy more BAC if it's fair valued?).  And if you were thinking of exiting the stock when it's fair valued, then you would have missed out on much of the leverage potential of the warrants because on their way to fair value much of that premium you paid will be annihilated by the skewness effect of options pricing (which is what has so far happened as the "cost of leverage" has dropped so much with the rising stock price).  It's only when the warrants are held all the way to expiry that you have the best hope of getting your bang for the leverage incurred.

 

If it's not clear, anywhere I say "leveraged common" I'm talking about the strategy where the leverage is fully hedged with puts.

[ERICOPOLY]

The thing with the dividend knocking the strike price down is that it's much more effective than just using the dividend to buy more common.

 

I disagree.  It actually works out the same as just using the dividend to buy more common. 

 

FIRST:

They adjust the strike price penny for penny with the dividend.  All they are doing is recording your dividend as a capital gain (taxed as a dividend instead).  So your total value here is the same.  Ten cents of dividend in cash, or ten cents of dividend's worth of strike adjustment.

 

SECOND:

They adjust the number of shares the warrant converts to.  The adjustment happens to be exactly the number of shares that you would otherwise have been able to afford with the cash dividend.

 

It's just a synthetic DRIP!

 

[nkp007]

 

It's just a synthetic DRIP!

 

 

That's what she said.

[Luke 532]

The thing with the dividend knocking the strike price down is that it's much more effective than just using the dividend to buy more common.

 

I disagree.  It actually works out the same as just using the dividend to buy more common. 

 

FIRST:

They adjust the strike price penny for penny with the dividend.  All they are doing is recording your dividend as a capital gain (taxed as a dividend instead).  So your total value here is the same.  Ten cents of dividend in cash, or ten cents of dividend's worth of strike adjustment.

 

SECOND:

They adjust the number of shares the warrant converts to.  The adjustment happens to be exactly the number of shares that you would otherwise have been able to afford with the cash dividend.

 

It's just a synthetic DRIP!

 

Last comment I'll make on the warrants because this isn't a BAC thread.

 

The shares/warrant conversion increases... so you get more shares per warrant as time goes by.  It doesn't decrease, it increases.  You get the dividend at twice the power because you own twice as many warrants as common shares, AND the increased shares/warrant.

 

And when the strike is adjusted down I get TWICE as much as the common holder.  Let's say someone owns 100,000 warrants instead of 50,000 shares (same amount invested).  A $0.11 dividend would give $0.10 adjustment to the strike price.  That's an immediate $0.10 gain on the 100,000 warrants (or $10,000).  The $0.11 the common holder gets on the 50,000 shares amounts to $5,500.  Nearly double the benefit on the warrants vs the common when it comes to dividends, and that's not even counting the increased shares/warrant!  These very attractive attributes are just one reason BAC W's are, by current market valuation, my largest holding.

 

OK, no more comments on this... back to SHLD.  Sorry everybody  :)

[constructive]

Bankruptcy; Lampert has done a great job of putting some excellent assets under non-guarantor subsidiaries; KCD, 125 'crown jewel' properties, etc.  Of course, if they declare bankruptcy the stock would obviously plummet regardless of the assets that are the ownership of shareholders and not bondholders (as are the non-guarantor subs).

 

The non-guarantor subs don't change the priority of creditors vs equity at the parent company level. They are bankruptcy remote from the parent and from other subs, but that doesn't mean that shareholders have more claim to their value than parent company creditors.

[ERICOPOLY]

The shares/warrant conversion increases... so you get more shares per warrant as time goes by.  It doesn't decrease, it increases.  You get the dividend at twice the power because you own twice as many warrants as common shares, AND the increased shares/warrant.

 

That's what I said.  The warrant adjusts to convert to more shares.  This is identical to a DRIP plan where you wind up with more shares because you've put the dividend into the shares.  Then under the DRIP plan, the next time a dividend is paid you get more dividends than on the first iteration because you now own more shares.

 

You just have to compare them side by side.  Take two warrants and two shares of common.  Get the dividends from the common and buy more shares at market price -- realize that it's exactly the same increase in share count as what goes on with the warrant adjustment.

 

Were the warrant adjustment (the conversion to # share count) to NOT happen, then you would in effect be getting the credit for the dividend (strike adjustment) but it would just be sitting there in synthetic cash not earning a return.  So the share count adjustment of the warrant is just the reinvestment of that cash value into the stock.

 

Again, it's just a DRIP.

 

And when the strike is adjusted down I get TWICE as much as the common holder.

 

Only because you are leveraged.  You have purchased warrants for two shares, so you get twice the dividend.  Now, if I have 2x leverage on the common stock in my portfolio margin account, then too get twice the dividend.  But I can go to 3x leverage and I have 3x the dividend.  There is nothing special here for the warrant.

[ScottHall]

Bankruptcy; Lampert has done a great job of putting some excellent assets under non-guarantor subsidiaries; KCD, 125 'crown jewel' properties, etc.  Of course, if they declare bankruptcy the stock would obviously plummet regardless of the assets that are the ownership of shareholders and not bondholders (as are the non-guarantor subs).

 

The non-guarantor subs don't change the priority of creditors vs equity at the parent company level. They are bankruptcy remote from the parent and from other subs, but that doesn't mean that shareholders have more claim to their value than parent company creditors.

 

I am surprised how many people don't grasp this, taking what little Berkowitz has said about the subject and applying their own twist to it.

 

It's pretty obvious there's quite a bit ahead of the equity if you read the credit and guarantee agreements SHLD has entered. Holdings guarantees SRAC's and KMart's credit line, itself. I think many of the people making these sort of claims haven't read the relevant documentation or don't have an adequate understanding of bankruptcy law to make these sort of statements.

[muscleman]

What is that famous saying?

 

"Turnarounds seldom turn."

 

It's not a turnaround in the traditional sense.  It's transitioning to a lighter footprint and more focused online model.  And if that's successful it's all gravy.  Worst case is they go the monetize real estate route, which is a bargain at today's price all by itself.

 

And I can think of one turnaround in particular that "failed" and the company is now arguably the most well-respected company in the entire investment world. 

 

SHLD isn't Sears.  It's a conglomerate of companies that are priced to all die (#3 online retailer, #1 appliance brand, $3B sales/year auto business, 18M sq ft REIT, etc.).

 

I am also a shareholder in the red. You seem to have very high convictions here, so I am wondering if you have done the exercise of tearing SHLD's subs apart and look at the liabilities and assets of each one, and also the corporate structure?

I tried to do that but didn't make it. There was parts that I didn't understand, and calling SHLD's IR never went through to a live person.

There were people claiming that SHLD's assets and liabilities are well seperated, so I would assume the structure would be something similar to MBIA, but MBIA's structure is way more simple than SHLD, so I can't verify that.

I only got to a point that KCD IP sub has the real estate and brands and they are leased to the retail subs. But I can't figure out if the retail subs go into bankruptcy, can the liability claims be made to the KCD IP assets.

 

I would hope that we could go deeper with this exercise, and eventually figure this puzzle out. :)

[T-bone1]

I apologize if this has already been posted and discussed, but I found this short presentation to be very helpful with regard to some of the issues that have been raised:

 

http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

 

-t-bone1

[Luke 532]

Bankruptcy; Lampert has done a great job of putting some excellent assets under non-guarantor subsidiaries; KCD, 125 'crown jewel' properties, etc.  Of course, if they declare bankruptcy the stock would obviously plummet regardless of the assets that are the ownership of shareholders and not bondholders (as are the non-guarantor subs).

 

The non-guarantor subs don't change the priority of creditors vs equity at the parent company level. They are bankruptcy remote from the parent and from other subs, but that doesn't mean that shareholders have more claim to their value than parent company creditors.

 

I am surprised how many people don't grasp this, taking what little Berkowitz has said about the subject and applying their own twist to it.

 

It's pretty obvious there's quite a bit ahead of the equity if you read the credit and guarantee agreements SHLD has entered. Holdings guarantees SRAC's and KMart's credit line, itself. I think many of the people making these sort of claims haven't read the relevant documentation or don't have an adequate understanding of bankruptcy law to make these sort of statements.

 

I admit I'm the last person to try and interpret bankruptcy law.

 

So are the following statements false?  Nobody refuted the first statement when it was made in the past (although that thread wasn't active at all).  On the second statement where it references the Second Amended Credit Agreement, is that completely false?  (don't rake me over the coals for referencing a Seeking Alpha article)  :)

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg69125/

"Not only does it appear that the debt is more than covered by hard assets, never mind the "intangibles" (which has been my loose calculation since 2006, though it has grown thinner recently.)

 

but if it is not, the debt holders have no legal claim on the other assets."

 

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

"This is a very in-depth topic. I am finishing up a detailed article about it. Eddie Lampert has more experience in the distribution of assets in a bankruptcy than probably any CEO in America, since that is how he bought Kmart. He knows how bankruptcy judges interpret the codes and who gets what assets during reorganization. The non-guarantor subsidiaries are structured with SHLD equity shareholders sitting in the catbird seat. The Sears Holdings notes and Sears, Roebuck Acceptance Corp. bonds were revised with the Second Amended Credit Agreement. It's pretty complex and heavy on legal provisions with the debt covenants, but the bottom line is non-guarantor subsidiaries will end up going to SHLD shareholders, not the bondholders."

[muscleman]

I apologize if this has already been posted and discussed, but I found this short presentation to be very helpful with regard to some of the issues that have been raised:

 

http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

 

-t-bone1

 

What is confusing here is that KCD IP is owned by the sears and KMart retail subs. This means if these two subs go down, the liability holders may claim on the equity interest of KCD IP. Am I wrong here?

[ScottHall]

I apologize if this has already been posted and discussed, but I found this short presentation to be very helpful with regard to some of the issues that have been raised:

 

http://www.searsholdings.com/invest/docs/Sears_Re_February_2012.pdf

 

-t-bone1

 

What is confusing here is that KCD IP is owned by the sears and KMart retail subs. This means if these two subs go down, the liability holders may claim on the equity interest of KCD IP. Am I wrong here?

 

No, you're correct.

 

Bankruptcy; Lampert has done a great job of putting some excellent assets under non-guarantor subsidiaries; KCD, 125 'crown jewel' properties, etc.  Of course, if they declare bankruptcy the stock would obviously plummet regardless of the assets that are the ownership of shareholders and not bondholders (as are the non-guarantor subs).

 

The non-guarantor subs don't change the priority of creditors vs equity at the parent company level. They are bankruptcy remote from the parent and from other subs, but that doesn't mean that shareholders have more claim to their value than parent company creditors.

 

I am surprised how many people don't grasp this, taking what little Berkowitz has said about the subject and applying their own twist to it.

 

It's pretty obvious there's quite a bit ahead of the equity if you read the credit and guarantee agreements SHLD has entered. Holdings guarantees SRAC's and KMart's credit line, itself. I think many of the people making these sort of claims haven't read the relevant documentation or don't have an adequate understanding of bankruptcy law to make these sort of statements.

 

I admit I'm the last person to try and interpret bankruptcy law.

 

So are the following statements false?  Nobody refuted the first statement when it was made in the past (although that thread wasn't active at all).  On the second statement where it references the Second Amended Credit Agreement, is that completely false?  (don't rake me over the coals for referencing a Seeking Alpha article)  :)

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/for-all-of-you-sears-holdings-longs!/msg69125/

"Not only does it appear that the debt is more than covered by hard assets, never mind the "intangibles" (which has been my loose calculation since 2006, though it has grown thinner recently.)

 

but if it is not, the debt holders have no legal claim on the other assets."

 

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

"This is a very in-depth topic. I am finishing up a detailed article about it. Eddie Lampert has more experience in the distribution of assets in a bankruptcy than probably any CEO in America, since that is how he bought Kmart. He knows how bankruptcy judges interpret the codes and who gets what assets during reorganization. The non-guarantor subsidiaries are structured with SHLD equity shareholders sitting in the catbird seat. The Sears Holdings notes and Sears, Roebuck Acceptance Corp. bonds were revised with the Second Amended Credit Agreement. It's pretty complex and heavy on legal provisions with the debt covenants, but the bottom line is non-guarantor subsidiaries will end up going to SHLD shareholders, not the bondholders."

 

The holding company debt isn't guaranteed by the subsidiaries, but all that means is that the creditors of Holdings can't go after the assets of those subsidiaries to satisfy their claims. The assets of those subsidiaries. They could still well end up with the equity interest in those subsidiaries.

 

I haven't been able to figure out what the SeekingAlpha author is talking about. I've read both the Second Amended & Restated Credit Agreement and the Guarantee Agreement. This is straight out of the Second Amended & Restated Guarantee agreement:

 

2.1 Guarantee. (a) Each of the Guarantors (other than the Borrowers) hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Control Co-Collateral Agent, for the ratable benefit of the Credit Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by each Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations of such Borrower. Each Borrower hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Control Co-Collateral Agent, for the ratable benefit of the Credit Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by each other Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations of each such other Borrower.

 

Sears Holdings is listed as a guarantor. Here is the documentation, if you want to read it yourself.

 

http://www.sec.gov/Archives/edgar/data/1310067/000119312511144672/dex104.htm

http://www.sec.gov/Archives/edgar/data/1310067/000119312511144672/dex103.htm