A bankruptcy judge on Feb. 7 approved a $5.2 billion plan by Sears’ chairman and biggest shareholder to keep the iconic business going.
The approval means about 425 stores and 45,000 jobs will be preserved.
Eddie Lampert’s bid through an affiliate of his ESL hedge fund overcame opposition from a group of unsecured creditors, including mall owners and suppliers, that tried to block the sale and pushed hard for the company’s liquidation.
In delivering his decision, U.S. Bankruptcy Judge Robert Drain for the Southern District of New York rejected the group’s claims that the sale process was unfair and flawed, that it shut out any others who could have been interested in buying the business and that Sears had more value to its creditors if it died than if it lived.
But the ghost of Toys R Us loomed large in the Sears bankruptcy case. The toy retailer was forced into liquidation last year just months after it tried to reorganize under bankruptcy court, wiping out 30,000 jobs.
During the hearing, which started Feb. 4, Drain focused on the specter of jobs and put the lawyers representing the creditors’ group on the defense. Lawyers for Sears and ESL argued that the sale offered the best alternative and also played up the need to save jobs.
Drain is expected to enter his order Feb. 8, making it official.
Sears Chairman Eddie Lampert (Gregory Bull/Associated Press)
Even with this latest reprieve, Sears’ long-term survival remains an open question. ESL President Kunal Kamlani shared his vision this week of building a network of smaller stores that highlights mattresses and major appliances, but the details still are lacking.
In fact, William Transier, an independent board member of Sears since October, acknowledged during the hearing that Sears could shutter an average of three stores per month and sell $600 million in real estate over the next three years. And the company still faces cutthroat competition from Amazon, Target and Walmart.
“Major hurdles to its long-term business remain,” wrote Moody’s department store analyst Christina Boni, in a note published Feb. 7. “Scale, which is critical to competing in retail today, will be lacking and its core customer proposition still remains in question.”
Lampert, who merged Sears and Kmart in 2005, steered Sears into Chapter 11 bankruptcy protection in October. The company’s corporate parent, which also owns Kmart, had 687 stores and 68,000 employees at the time of the filing. At its peak in 2012, its stores numbered 4,000.
Sears was hard hit during the recession and was unable in its aftermath to keep up with shifting consumer trends and strong rivals. It hasn’t had a profitable year since 2010 and has suffered 11 straight years of declining sales.
Lampert’s original plan was rejected by a subcommittee of the Sears board. ESL sweetened the bid several times before the subcommittee gave it the OK. Lampert also tried to get release from litigation claims as part of the deal to buy the company. But the subcommittee of the Sears board overseeing the auction pushed back, and Lampert and ESL can be sued for certain past deals prior to the bankruptcy. The committee of unsecured creditors has maintained there’s value in those litigation claims.
The group, which ranks at the bottom of the list to be paid, filed objections to the sale, alleging falsified financial projections, excessive buybacks, and a spinoff of brands that stripped the business of key assets.
“The tortured story of Sears reads like a Shakespearean tragedy,” the group said. “Lampert and ESL managed Sears as if it were a private portfolio company that existed solely to provide the greatest returns on their investment, recklessly disregarding the damage to Sears, its employees and its creditors.”
Lampert owns 31% of the Sears’ outstanding stock, and his hedge fund has an 18.5% stake, according to FactSet. He stepped down as CEO in October after serving in that role since 2013.
Under Lampert’s watch, the Hoffman Estates, Ill.-based retailer has survived in part by spinning off stores and selling well-known brands such as Craftsman tools. He has also lent some of his own money.
One of the lawyers for Lampert’s hedge fund testified earlier this week that the 56-year-old billionaire has been portrayed as a cross between J.Gould, the late railroad tycoon, and Barney Fife, a fictional character in “The Andy Griffin Show.”
Drain, the bankruptcy judge, acknowledged that Lampert had been subject to “verbal abuse.” “He is a wealthy individual and a big boy,” Drain said. “And I guess he can take it.”
But he urged Lampert, who wasn’t in the courtroom, to have constant communications with the company and its employees. Lampert “has an opportunity to not be a cartoon character … He should do that,” Drain said.