Sears pre­pares to file for bank­ruptcy in com­ing days

Business World - - World Business - IN THE SHADOW OF TOYS ‘R’ US

NEW YORK — Sears Hold­ings Corp. is pre­par­ing to file for Chap­ter 11 bank­ruptcy pro­tec­tion in the com­ing days fol­low­ing years of de­clin­ing sales, sources said on Wed­nes­day, cast­ing doubt over the sur­vival of what was once the world’s largest re­tailer.

The bank­ruptcy fil­ing would end a stand­off be­tween Chief Ex­ec­u­tive Of­fi­cer (CEO) Ed­die Lam­pert, the re­tailer’s big­gest share­holder and lender, and a spe­cial board com­mit­tee the com­pany has formed to con­sider a res­cue plan pro­posed by Mr. Lam­pert that would in­volve as­set sales and a debt re­struc­tur­ing.

The com­mit­tee has been re­sist­ing the plan amid con­cerns that cred­i­tors and share­hold­ers would sue over it be­ing too fa­vor­able for Lam­pert. His his­tory of fi­nan­cial engi­neer­ing at Sears for more than a decade through deals tied to his hedge fund ESL In­vest­ments Inc could now be sub­jected to new scru­tiny by Sears’ cred­i­tors in bank­ruptcy court, ac­cord­ing to the sources.

Both Mr. Lam­pert and the Sears spe­cial com­mit­tee now ac­cept that only a court-su­per­vised process can de­ter­mine the com­pany’s fu­ture, one of the sources said. Talks are un­der way to ar­range debtor-in-pos­ses­sion fi­nanc­ing for a bank­ruptcy fil­ing that could come in the next few days, the sources added. CNBC first re­ported on the debtor-in­pos­ses­sion fi­nanc­ing talks, while the

Wall Street Jour­nal first re­ported on Sears’ bank­ruptcy prepa­ra­tions.

A $134-mil­lion debt pay­ment that Sears has to meet on Mon­day has added pres­sure on both Mr. Lam­pert and the spe­cial com­mit­tee to find a res­o­lu­tion. Mr. Lam­pert had told the spe­cial com­mit­tee he would not help the com­pany fund that obli­ga­tion un­less it agreed to his plan, the sources said.

The sources asked not to be iden­ti­fied be­cause the mat­ter is con­fi­den­tial. Spokes­peo­ple for Mr. Lam­pert and Sears de­clined to com­ment.

“For what­ever rea­son, Sears’ board said enough is enough,” said Chad Brand, pres­i­dent of Peri­dot Cap­i­tal Man­age­ment, which holds Sears bonds. Mr. Brand added that he had sig­nif­i­cantly cut down on his Sears bond hold­ings ear­lier this year amid con­cerns from his clients.

At its peak in the 1960s, Sears sold every­thing from toys and auto parts to mail-or­der homes, and was a key ten­ant in al­most ev­ery big mall across the US. But it has strug­gled to rein­vent it­self in the face of on­line com­pe­ti­tion from com­pa­nies such as Ama­zon.com, Inc. as well as from other brick-and-mor­tar re­tail­ers, in­clud­ing Wal­mart, Inc. It is not clear whether Sears would sur­vive a bank­ruptcy process. When Toys “R” Us, the largest spe­cialty toy re­tailer, filed for bank­ruptcy pro­tec­tion last Septem­ber, it sought to emerge from it af­ter re­struc­tur­ing its debt and shut­ting stores. In­stead, it was forced to liq­ui­date last March, af­ter cred­i­tors balked at pro­vid­ing a new life­line to the com­pany.

If Sears were to file for bank­ruptcy, its fi­nan­cial per­for­mance dur­ing the up­com­ing hol­i­day sea­son could prove cru­cial in de­ter­min­ing its fu­ture, ac­cord­ing to the sources. Toys “R” Us’ cred­i­tors lost faith in the re­tailer af­ter rev­enue dur­ing last year’s hol­i­day sea­son failed to meet their ex­pec­ta­tions.

Re­tain­ing the con­fi­dence of ven­dors is also key to Sears re­main­ing op­er­a­tional. Vic­tor Sandy, who helps sup­pli­ers hedge the risk of non­pay­ment for goods at Michi­gan-based Global Com­mer­cial Credit LLC, said ven­dors will be look­ing to see if Sears can se­cure enough fi­nanc­ing to see it through bank­ruptcy.

“The risk is a for­mal re­or­ga­ni­za­tion turns into a liq­ui­da­tion if things do not go well. That is a real risk that we saw hap­pen with Toys “R” Us,” said Sandy.

Sears shares were down 31% at 40.5 cents in af­ter­noon trad­ing in New York, giv­ing the com­pany a mar­ket cap­i­tal­iza­tion of just $40 mil­lion. The stock, which traded above $100 a decade ago, has fallen to less than $1 in the past year. Sears’ bor­row­ings to­taled $5 bil­lion as of Aug. 4.

The Hoff­man Es­tates, Illi­nois-based re­tailer has posted seven straight years of losses and its sales have not grown since the 2008 fi­nan­cial crisis. The re­tailer warned last month it may go out of busi­ness if the deals pro­posed by Mr. Lam­pert were not ap­proved.

Mr. Lam­pert, who cre­ated Sears in its cur­rent form in 2005 by ac­quir­ing it in a $11-bil­lion deal and merg­ing it with his dis­count re­tailer Kmart, pro­posed deals to re­duce the com­pany’s debt load to $1.2 bil­lion from $5.6 bil­lion in Septem­ber. The Sears spe­cial com­mit­tee had also been weigh­ing a prior of­fer from Mr. Lam­pert to ac­quire the re­tailer’s Ken­more ap­pli­ances brand and its home ser­vices busi­ness for as much as $480 mil­lion. —

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