This makes perfect sense and goes to a post I wrote 3/18 on the subject.
Sears Holdings, the giant retailer controlled by Mr. Lampert’s hedge fund, ESL Investments, bought 400,000 shares of Sears Canada on Monday, people with knowledge of the transaction told DealBook.
Add that to stock purchases made in December and early March, totaling 60,000 shares, and Sears now owns about 74 percent of its Canadian counterpart.
So what’s Mr. Lampert up to? He won’t say, and a spokesman declined to comment. But analysts and investors believe Sears could soon try to buy the remaining shares of Sears Canada that it doesn’t already own.
In the past year, Sears has been hurt by falling consumer spending. And the retailer faces the expiration next March of a $4 billion revolving credit facility it uses to pay suppliers and fund other working capital needs. Securing a new loan of that size could carry a hefty interest rate, given Sears’ already leveraged balance sheet, the ongoing credit squeeze and a continued drop in the company’s earnings.
But acquiring Sears Canada would actually reduce the company’s overall debt-to-earnings ratio and, therefore make it much cheaper to obtain a new multi-billion dollar loan. What’s more, it would cost Mr. Lampert and Sears virtually nothing.
Analysts point out that Sears Canada has more than $630 million in cash on its balance sheet and swaths of valuable real estate. Mr. Lampert could easily use Sears Canada’s own cash to finance a deal, or he could use Sears’ stock, which would be even cheaper.
According to a recent analysis by RBC Capital Markets, Sears could buy the remaining shares of Sears Canada for 23.38 Canadian dollars per share — an 18 percent premium to the current stock price — and still have cash that leftover that can be consolidated onto its balance sheet.
Sears Canada is also performing better than its American counterpart and any deal would be accretive to the combined company’s earnings.
Still, Mr. Lampert will have to deal with an old nemesis: fellow activist investor William A. Ackman, whose Pershing Square Capital Management owns 17.2 percent of Sears Canada and would likely to demand a big premium for its shares.
Under Canadian law, Sears must get the approval of all minority shareholders before making a deal for the whole company. That could lead to a showdown with Mr. Ackman, who isn’t shy about demanding a higher price.
Over two years ago, Mr. Ackman led a group of shareholders that rejected Sears’ first offer for Sears Canada. The price, $18 a share, or $792 million, was deemed too low by Pershing Square and other investors who voted down the deal. Mr. Lampert decided to walk away.
Mr. Ackman seems to believe another bid could be coming soon — Pershing purchased over a million shares of the thinly traded company in the last quarter. With the $4 billion revolver coming due next year, Mr. Lampert may not be so quick to walk away this time.
Lampert can effectively run his stake up to 83% before he is forced to deal with Ackman. At that point, he can simply just let his stake sit. Ackman has said in the past he want to avoid situations in which he cannot be a majority shareholder as he has no power to effect change.
It will come down to a test of patience. Lampert wants Sears Canada for it cash, Ackman owns shares for the buyout premium he thinks he’ll get from Lampert. Can Lampert wait longer for the cash than Ackman will wait to find a better use for the money he has invested in Canada shares?
One must also assume not much will happen on either front for a while. Lampert will probably just keep buying what is on the open market until he is only forced to deal with Ackman.
Either way it will make for a fun spectator sport this summer/fall
Disclosure (“none” means no position):Long SHLD
4 replies on “Lampert Ups Sears Canada Stake to 74%”
From what I comprehend of reading Sears 10-Ks, SHLD already counts all the Sears Canada assets on the books–certainly the cash(which I don’t quite understand how they can do that). I think there are limitations to how SHLD can use the Canadian cash (and given the Sears Canada has more cash than Sears Domestic that’s a big deal) so that may be the motivation for Eddie’s gambit (and Ackman’s too).
Sears Canada is actually a pretty decent retailer, the only thing that could destroy it is if Eddie got to run it like the US counterpart.
Joe,
they do not currently count all Sears canada’s cash. the difference in what it looks like is due the currency. sears canada reports in canadian dollars.
It looks to me like SHLD counts all the Canada cash on the 10-K (after adjusting for currency rates). What I don’t understand is why they count all of it instead of 75% (the portion of Sears Canada they own).
I’ve been around the internet for some time trying to figure this out. Does Sears Canada have to do a dividend issuance to pass the cash to SHLD (or 75% of the cash)? Sears Canada actually uses some it’s cash as collateral for borrowing. There’s also some mention in the last 10-K of SHLD actually borrowing from Sears Canada and Orchard Hardware instead of their revolver. Exactly to what extent and for what purpose SHLD can use the cash is not obvious.
As cash dries up in the Sears Domestic division these questions are more pertinent.
SHLD has to consolidate the financial records of its subsidiaries onto its financial records according to SFAS160. Once a company owns more than 50% of an investment, it is considered to have significant control over that investment. As such, they are considered a business combination.
This accounting rule is the reason SHLD adds all of Sears Canada’s cash. It is able to do this by subtracting out the value of the non-controlling interest or minority interest later on the balance sheet. The value on the non-controlling interest is thought to represent the claim on the subsidiary’s assets by the non-controlling shareholders (the 26% held by others, 17% of which is by Ackman in this case.)