Sears was ex­pen­sive bet for CEO

Hedge-fund man­ager has stuck with com­pany through its long de­cline

Winnipeg Free Press - - BUSINESS - KATHER­INE BUR­TON, LAU­REN COLE­MAN-LOCHNER AND EL­IZA RONALDS-HAN­NON

IT by bit, the smart money de­serted Ed­ward Lam­pert.

Michael Dell, David Gef­fen, Ge­orge Soros, the Ziff broth­ers — by

2012, all of them, and many more, had peeled away.

Not even Lam­pert’s friends could un­der­stand why the hedge-fund man­ager, once hailed as a young War­ren Buf­fett, clung to his spec­tac­u­larly bad in­vest­ment in Sears, a dy­ing de­part­ment store chain.

Granted, other hedge-fund ti­tans have blown it, from Ju­lian Robertson with US Air­ways to Bill Ack­man with Her­bal­ife. But few have rid­den a dis­as­ter so pub­licly, over so many years, with such an iconic brand. It was hubris, many now say, and a fail­ure to fol­low the in­vestor com­mand­ment: get out in time.

Lam­pert, who lost many mil­lions as Sears Hold­ings Corp. shares ground down to pen­nies, kept throw­ing the com­pany life­lines. From the mo­ment he bought into what was then called Sears, Roe­buck & Co., he also ma­noeu­vred to pro­tect his fi­nan­cial in­ter­ests. At times, he even made money. He closed stores, fired em­ploy­ees and, in what will surely be long re­mem­bered as the most un­seemly el­e­ment of the saga, carved out some choice as­sets for him­self.

Un­til, at last, the reck­on­ing. Af­ter

13 years un­der Lam­pert’s stew­ard­ship, Sears fi­nally seems to be hurtling to­ward bankruptcy, if not out­right liq­ui­da­tion. And, once again, Wall Street is won­der­ing what Ed­die Lam­pert will sal­vage for him­self and his US$1.3-bil­lion fund, ESL In­vest­ments Inc., whose fu­ture may now be in doubt.

“He’s been do­ing a lot of fi­nan­cial en­gi­neer­ing, but he’s just been mov­ing around the deck chairs on the Ti­tanic,” said Van Con­way, a re­struc­tur­ing ex­pert who worked on Detroit’s bankruptcy. “It looks like he’s played al­most a full deck of cards by now.”

For years, bankruptcy court had been ac­cepted by most ev­ery­one ex­cept Lam­pert as un­avoid­able. He re­fused to give in, propos­ing a plugthe-holes ma­noeu­vre just two weeks ago, af­ter years of machi­na­tions that kept the ba­sic gears go­ing even as the com­pany was bleed­ing out.

At 56, he’s still a bil­lion­aire. A Sears bankruptcy isn’t likely to change that for the chief ex­ec­u­tive of­fi­cer and chair­man.

Un­der the fil­ing the com­pany is said to be pre­par­ing for as soon as this week­end, he and ESL — to­gether they hold al­most 50 per cent of the shares — would be at the head of the line when the rem­nants are dis­persed. As se­cured cred­i­tors, Lam­pert and the fund could get 100 cents on the dol­lar, along with oth­ers in the pro­tected camp, in­clud­ing Wells Fargo & Co. and Cit­i­group Inc.

Lam­pert has ma­noeu­vred out of tight spots be­fore, most fa­mously when he per­suaded four men who kid­napped him in Jan­uary 2003 to let him go af­ter hold­ing him for 30 hours, blind­folded and hand­cuffed, in a mo­tel bath­room. But sav­ing sink­ing Sears re­quired more than fast talk.

His last idea was a debt re­struc­tur­ing that re­ceived lit­tle or no sup­port from other cred­i­tors, who saw it as a scheme to al­low ESL to be paid for Sears’ real es­tate, ac­cord­ing to a per­son with di­rect knowl­edge of the sit­u­a­tion. Part of this Lam­pert plan was to have un­se­cured cred­i­tors swap their debt for equity, a fool’s trade in the view of most an­a­lysts.

There’s no ques­tion Sears has cost him, and not only in rep­u­ta­tion: he saw about US$240 mil­lion worth of stock that he per­son­ally pur­chased evap­o­rate as the shares tum­bled. An­other US$287 mil­lion that he re­ceived in com­pen­sa­tion has all but dis­ap­peared. ESL has lost US$65 mil­lion just this year.

The hedge fund’s as­sets plum­meted

Bto around US$1 bil­lion from US$15 bil­lion in 2006 as the port­fo­lio shrank from a half-dozen to the one mas­sive crap­shoot on Sears. The big-name in­vestors ex­ited and so did Goldman Sachs clients who had come into ESL as part of a US$3.5-bil­lion cap­i­tal raise in late 2007 and early 2008.

Still, as Sears’ ma­jor debt holder, with roughly half of the com­pany’s US$5.3 bil­lion to­tal, ESL saw a bit of up­side, ex­tract­ing more than US$200 mil­lion in in­ter­est pay­ments a year.

And Lam­pert carved out what looked like — and in some cases might yet be — saves for him­self, with spinoffs that gave him chunks of equity in new com­pa­nies. One was Ser­itage Growth Prop­er­ties, the real es­tate in­vest­ment trust that counts Sears as its big­gest ten­ant and of which Lam­pert is the largest share­holder; he cre­ated it in 2015 to hold stores that were leased back to Sears — cor­don­ing those off from any bankruptcy pro­ceed­ing. He and ESL got a ma­jor­ity stake in Land’s End, the ap­parel and ac­ces­sories maker he split from Sears in 2014.

The Sears Canada Inc. gam­ble was a fum­ble; that spinoff be­gan liq­ui­dat­ing one year ago. Lam­pert and ESL to­gether had al­most US$300 mil­lion in that stock and both rode it to zero, though they did pocket US$25 mil­lion in spe­cial div­i­dends. Lam­pert is the chief share­holder in the Sears Home­town and Out­let Stores Inc., a stock that has tanked along with its for­mer par­ent.

All those spinoffs robbed Sears of as­sets when it needed them, said Mark Co­hen, a for­mer CEO of Sears Canada and fre­quent Lam­pert critic who’s an ad­junct pro­fes­sor of re­tail stud­ies at Columbia Uni­ver­sity. “This com­pletely un­con­ven­tional way of man­ag­ing a busi­ness might have been an in­ter­est­ing al­ter­na­tive oper­at­ing strat­egy were it not for the fact that it has been a colos­sal fail­ure.”

Over the years of prop­ping Sears up, Lam­pert threw his own money into the ef­fort, and his friends and sup­port­ers said this wasn’t only in self in­ter­est: he wanted to keep the lights on and peo­ple em­ployed. He and ESL were will­ing to lend at much lower rates than oth­ers were de­mand­ing. He had Sears pay al­most US$2 bil­lion into the un­funded pen­sion plan in the past five years.

Noth­ing Lam­pert won out of Sears’s spinoffs was the re­sult of spe­cial treat­ment, said Paul Holmes, a spokesman for ESL. “As we have said pre­vi­ously, the Land’s End and Ser­itage trans­ac­tions were car­ried out on trans­par­ent terms that de­liv­ered value to all Sears share­hold­ers and ev­ery share­holder had the same op­por­tu­nity to par­tic­i­pate.”

The de­feat of a bankruptcy fil­ing won’t dull Lam­pert’s pas­sion, ac­cord­ing to peo­ple close to him. He’ll con­tinue to lead his low-key bil­lion­aire life, read­ing, rid­ing his rac­ing bi­cy­cles and spend­ing time on his 288-foot yacht. (Lam­pert named it The Foun­tain­head, af­ter the 1943 novel by Ayn Rand, whose books glo­rify in­di­vid­u­al­ism and the pur­suit of riches.) And look­ing for deals. It hasn’t been un­usual for him to walk out in the mid­dle of din­ner par­ties or­ga­nized by his wife to hunch over his phone or a com­puter in an­other room, ac­cord­ing to peo­ple who have at­tended the events, and on oc­ca­sion, he hasn’t shown up for the meal at all.

Lam­pert started ESL — for Ed­ward Scott Lam­pert — in 1988 af­ter three years at Goldman. Richard Rain­wa­ter, who over­saw the Bass broth­ers for­tune, staked him US$28 mil­lion to get go­ing.

By the time he was 43, he was a bil­lion­aire three times over. He hit home runs, the most im­pres­sive with the auto-parts re­tailer Au­toZone and the car seller Au­toNa­tion Inc. His clients saw an­nu­al­ized re­turns of more than 20 per cent af­ter fees un­til 2001. Even with the Sears fi­asco, an in­vestor who has been with Lam­pert from the be­gin­ning would now still be en­joy­ing an an­nu­al­ized re­turn of about 12 per cent.

He had what looked like an­other suc­cess on his hands in 2002, when he bought Kmart’s un­se­cured debt for around US$700 mil­lion. Within two weeks, he’d or­ches­trated the re­tailer’s exit from bankruptcy and emerged as its big­gest share­holder.

Kmart was throw­ing off cash back then and Lam­pert mas­ter­minded the merger with Sears. It wasn’t im­me­di­ately a dis­as­ter, but losses started pil­ing up.

Sears rolled through four CEOs in eight years and Lam­pert took over in Jan­uary 2013. But he shows up at the head­quar­ters out­side Chicago only a few times a year. He prefers to beam in from his of­fice in Florida; while he still owns a home in Con­necti­cut he lives most of the time in a US$40-mil­lion es­tate on In­dian Creek, an is­land in Key Bis­cayne that’s home to two dozen or so of Mi­ami’s uber wealthy.

As he cut costs to the bone, he pit­ted ex­ec­u­tives against one an­other in a bat­tle for scarce re­sources in a sort of a re­tail Hunger Games, peo­ple who worked for him said. He ruf­fled feath­ers by be­ing a mi­cro­man­ager with lit­tle in­ter­est in heed­ing the ad­vice of top ex­ec­u­tives, ac­cord­ing to one for­mer high-rank­ing em­ployee, who like oth­ers in­ter­viewed for this story asked not to be named for fear of an­ger­ing Lam­pert. An­other per­son re­called an un­com­fort­able con­fer­ence call dur­ing which Lam­pert cut off one of his own ex­ec­u­tives, with an in­vestor also on the line, with a quiet but dis­mis­sive, “That’s id­i­otic.”

Per­haps his big­gest mis­step was think­ing he could power through the re­ces­sion. He had the op­por­tu­nity to can­cel a mas­sive num­ber of leases on Sears stores in the af­ter­math of the fi­nan­cial cri­sis, ac­cord­ing to peo­ple fa­mil­iar with the com­pany. In­stead, he re­newed them.

Rain­wa­ter, who died in 2015, had pulled his money out of the fund when Lam­pert de­cided to move be­yond pick­ing stocks to takeovers and buy­outs, think­ing the young man wasn’t ready. Part of it, Rain­wa­ter told the Wall Street Jour­nal in 1991, was what he saw as the down­side to Lam­pert’s ex­cep­tional drive: “He’s so ob­sessed with mov­ing in the di­rec­tion he wants to move that peo­ple get burned, tram­pled on, run into.”

Those words now seem prophetic.

AMANDA GOR­DON / BLOOMBERG FILES

Ed­ward Lam­pert, Sears Hold­ings Corp. CEO, has run the com­pany since Jan­uary 2013.

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