Sears Holding Corp to raise $380-million through sale of most of its stake in Sears Canada
Sears Holdings Corp (NYSE:SHLD) said it would raise up to US$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
Hollie Shaw
TORONTO – Under a deal announced Thursday, Sears Canada Inc. will be getting some new owners — ones who look a lot like its old owners.
After failing to find a buyer for its 51% stake in the Canadian business, Sears Holdings Corp. decided to offer up its shares in the Toronto-based retailer to its own shareholders in a rights offering.
The move will deliver some much-needed liquidity to the U.S merchant as it heads into the Christmas season — as much as US$380-million in proceeds by early November — and the Hoffman Estates, Ill.-based retailer would no longer be the biggest shareholder of Sears Canada.
But Sears Holdings' own CEO and biggest shareholder, Edward Lampert, will be.
How significantly Mr. Lampert's act of financial engineering will affect day-to-day business at Sears Canada is unclear.
While the billionaire investor ostensibly has had no direct influence over the Canadian chain in recent years, he has been one of its largest beneficiaries of the special dividends Sears Canada has issued after divesting assets.
Under the deal, shareholders of Sears Holdings will have the right to buy one share of Sears Canada for each share they own at $10.60 per share.
The sale of 40-million Sears Canada shares will leave Sears Holdings with an 11.74% stake in the Canadian company.
And while the share sale will put more distance between Sears Canada and Sears Holdings, the same can't be said for the latter's CEO.
"Sears Holdings management will presumably in future be directing 100% of its attention to the U.S. business," while Mr. Lampert and his hedge fund ESL Investments Inc. will oversee the management of both Sears Holdings and Sears Canada, analyst Keith Howlett of Desjardins Securities wrote in a note to clients.
"The fact that he will purchase shares at $10.60 should provide a near-term floor under the shares," he added.
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Mr. Howlett believes an operating turnaround at Sears Canada is unlikely, its worth at this point being "primarily dependent on the value of its assets to other owners."
After the offering goes through, Mr. Lampert and ESL will have a combined 46.7% stake in the Canadian retailer, up from about 27% currently.
Thursday's offer also assumes the remainder of Sears Holdings' shareholders will be interested in buying into a retailer with dwindling prospects, albeit at a discount.
"A shareholder might just not do anything and let the rights expire," said Bob Gibson, a retail analyst at Octagon Capital in Toronto.
"If you are a U.S. institution who holds Sears Holdings right now, they are worth something. Many of those portfolios would only be able to hold U.S. stock, so portfolio managers would want to sell those rights [to buy Sears Canada shares at $10.60]. For now, they would be worth something. But if the stock price goes below $10.60, the rights will have no value."
Sears Canada closed at $11.00, down 12¢ of 1.1% in Toronto trading.
Sears Holdings has been long viewed by the financial community with a jaundiced eye.
Last month, it borrowed US$400-million as a short-term loan from Mr. Lamperts' investment firm. That move prompted Fitch Ratings to downgrade Sears Holdings' credit rating to junk status, saying the move was a short-term fix.
The retailer, which also operates U.S. stores under the Kmart banner, has raised money by selling or spinning off assets including its catalogue division Lands' End, which delivered proceeds of US$500-million at the end of last year.
In May, the company hired Bank of America Merrill Lynch to look at strategic options for the Canadian unit, including a possible sale of its stake.
Sears Canada has grappled with its own capital structure amid eight straight years of dwindling sales, which fell to $3.9-billion last year from $4.3-billion in 2012.
In August it posted its ninth loss in 14 quarters, and last month CEO Douglas Campbell announced he would leave the helm of the retailer by the end of the year. In 2012 the company began selling some long-term leases in A-list malls back to its landlords to raise cash, and has slashed costs by outsourcing IT, apparel design and call centre positions.
Sears Canada also said Thursday that it will amend its licensing deal with Sears Holdings, allowing it to keep using the Sears name and certain other brand names as long as Sears Holdings maintains a 10% stake, down from the prior minimum of 25%.
The Canadian retailer would also have rights to the Sears trademarks without having to pay royalties for five years after the licensing agreement ends, up from three years. Sears Canada will also apply for a Nasdaq listing.
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