The Daily Parker

Over the weekend, Sears Holdings Corp. started making preparations for winding down the business, after chairman and company killer Eddie Lampert's bid fell apart:

The iconic retailer started laying the groundwork for a liquidation after meetings Friday in which its advisers weighed the merits of a $4.4 billion bid by Lampert’s hedge fund to buy Sears as a going concern, said the people, who asked not to be identified because the discussions are private. If the 125-year-old retailer does die in bankruptcy — like Toys “R” Us in 2018, and Borders Group Inc. in 2011 — it would mark the largest fatality yet in the retail apocalypse prompted by a shift to online shopping.

While Lampert’s ESL Investments has failed to convince the bankers of the viability of its bid, it could still make last-minute improvements before a status hearing on Tuesday. Lampert also has outlined a back-up plan in which ESL would pursue the purchase of some of Sears’s parts, including real estate and intellectual property, such as its brand.

Earlier in the bankruptcy, creditors questioned whether transactions involving Lampert had bilked them of $2.6 billion, setting the stage for conflict over deals with the very investor who is offering to salvage the company. Lampert’s ESL said its transactions were made in good faith and on fair terms to other stakeholders.

I think justice demands that Lampert himself suffer bankruptcy and irrelevance. But, as Robert Heinlein said decades ago, TANJ.

Two good stories and a bad one.

First, a good story: Chicago now has more breweries than any other city in the US:

The metro region has surged past several longtime stalwarts to become home to more breweries than any other city in the nation — 167 — according to statistics published this week by the Brewers Association.

Behind it are the metro areas that for years Chicago beer drinkers could only envy: Denver (158), Seattle (153) and San Diego (150).

In fifth and sixth places are two other large cities whose brewing scenes have surged in recent years: Los Angeles (146) and New York (141).

Seems like I have some work to do over the next few months.

Now the bad story: Eddie Lampert can't save Sears. But we knew that:

If you believe Edward Lampert has finally figured out how to revive Sears, then you probably still believe in Santa Claus. The hedge fund mogul who oversaw the 125-year-old retailer’s long slide into bankruptcy is dangling the prospect of an 11th-hour buyout, casting his proposal as an altruistic effort to save the remaining 50,000 jobs at Sears.

My advice to those workers: Don’t expect a Christmas miracle.

First of all, there’s less to Lampert’s offer than initial appearances suggest. It’s been touted as a $4.6 billion bid to buy Sears out of bankruptcy, where it landed in October after losing $11 billion since 2011. But $1.8 billion of the offer would take the form of debt forgiveness by Lampert-affiliated entities, Sears’ largest lenders with about $2.6 billion in company debt. About $950 million would be cash, provided Lampert can find a lender willing to front the money. (As has been the pattern in recent years, Lampert isn’t putting more of his own cash into Sears.) Another $1 billion or so represents Sears liabilities to be assumed by a new company Lampert would form to acquire company assets including 500 stores, inventories, and the Kenmore and DieHard brands.

Oh, and Lampert also wants releases from claims related to his pre-bankruptcy transactions with Sears. Other creditors have commissioned an investigation into whether Lampert, Sears’ controlling shareholder since 2005 and CEO from 2013 until October’s Chapter 11 filing, gave himself favorable treatment in such deals as the spinoff of Lands End and the sale of Sears real estate to a newly formed company where he has a controlling stake.

And finally, another good story: the CTA will start modernizing the stretch of the El that goes by my neighborhood this fall, completing it just in time for the renovation of the Uptown Theater. Should all of this come together, it means I bought my apartment at exactly the right time:

The Red and Purple Line project will rebuild stations, bridges and track along a century-old corridor between Lawrence and Bryn Mawr avenues on the Red Line, the agency’s busiest line, CTA officials said. The construction also will include a controversial bypass that will take Brown Line trains above Red and Purple Line trains north of the busy Belmont station, CTA officials said.

Construction is expected to start in the fall of 2019, with the entire project to be completed in 2025, CTA spokeswoman Tammy Chase said.

Chase said that by the end of 2019, the CTA expects to start advance work to prepare for later phases of the project. This work will include building temporary stations to replace the Lawrence, Argyle, Berwyn and Bryn Mawr stations, which will be rebuilt. The CTA also will do track work to prepare for further repairs. Exact timing for the work will depend on the contractor.

Chase said the bypass work will start in 2020. The agency will start building new stations from Lawrence to Bryn Mawr in about two or three years, she said.

That will make a huge difference in Uptown, where the 110-year-old El stations look like they're about to collapse on themselves.

Eddie Lampert's hedge fund proposes to buy Sears for $4.6 bn:

The bid from Lampert’s ESL Investments includes about 500 Sears and Kmart stores, headquarters and distribution centers, and Sears brands and businesses including Kenmore, DieHard and Sears Home Services.

“ESL believes that a future for Sears as a going concern is the only way to preserve tens of thousands of jobs and bring continued economic benefits to the many communities across the United States that are touched by Sears and Kmart stores,” Lampert’s hedge fund said in the letter sent to Sears’ investment banker Wednesday and filed Thursday with the U.S. Securities and Exchange Commission.

The $4.6 billion offer includes up to $950 million in cash that would be funded by a new loan and a $1.8 billion credit bid, in which ESL would swap Sears debt it holds for ownership of a newly formed company. Other financing includes an estimated $1.1 billion from taking on Sears’ obligations to honor Sears Home Services protection agreements, gift cards, and loyalty program points.

ESL’s offer would also depend on its ability to secure financing and the Bankruptcy Court’s approval.

Others interested in acquiring Sears’ assets have until Dec. 28 to submit bids under the timeline approved by the Bankruptcy Court. If other bids come in, the auction would be held Jan. 14.

Why, though? He's just going to kill it anyway.

The Chicago Tribune points out that Sears' $5 bn in losses could actually help the guy who killed it, Eddie Lampert:

As of the retailer's bankruptcy on Oct. 15, Sears estimated it had net operating losses it could use to offset $5 billion of future taxable income, and separate tax credits of around $900 million. These are the most valuable assets Sears has, and under U.S. tax law, they could disappear in bankruptcy if another company or investor takes the company over.

When a company has accumulated net operating losses, it can use them to offset future taxable income, which in turn cuts into its tax bills. The rule is meant to give struggling companies more breathing room. That means big benefits on the balance sheet. For example, Sears saved $1.7 billion in deferred taxes in 2017, according to its most recent quarterly filing.

While a sale in bankruptcy would often mean a change in control, meaning that such tax benefits are lost, Lampert's stock and debt stakes would help him avoid that. Lampert and his hedge fund ESL Investments Inc., together own about 49 percent of Sears shares, and are among Sears's biggest creditors, having extended it $2.66 billion in debt through various loans.

Creditors who have held debt for 18 months before the filing and whose debt rose in the ordinary course of Sears's business are "qualified creditors" who can thus avoid losing the tax assets even if there's a shift in control towards them.

He profits from destroying the company. Ain't America grand?

We have a deployment at work tonight at 5pm (because in financial firms, you always deploy at 5pm on Friday). Fortunately, we've already done a full test, so we're looking forward to a pretty boring deployment tonight.

Fortunately, we have the Internet, which has provided me with all of these things to read:

• It turns out, men are responsible for 100% of all unwanted pregnancies.
• Real, live diplomats explain how to respond to something like Jamal Khashoggi's apparent murder, and how we're not actually doing those things.
• The government of West Virginia, completely and utterly failing to understand (or simply disregarding) the actual security issues with elections, will allow people to vote by mobile phone app next month.
• The New York Times interviewed Eddie Lampert this week, with predictable results.
• A shouting match inside the White House shows how their plays to the base screw with the government's actual policies.
• Finally, the Times' travel section ran "36 Hours in Chicago" this morning, which should be fun as it was written by a New Yorker.

Back to planning for next week's post-deployment fixes.

As predicted, Eddie Lampert has succeeded in driving Sears into the ground:

In announcing the news, Sears said Edward Lampert stepped down as CEO effective immediately and remains chairman.

Sears and Kmart stores and online platforms will remain open, though the company also said it would close 142 unprofitable stores near yearend, with liquidation sales at those locations "expected to begin shortly."

The company said it has commitments for $300 million of debtor-in-possession financing from its senior secured asset-based revolving lenders and is negotiating a $300 million subordinated DIP financing with ESL Investments, where Lampert is chairman and CEO. The hedge fund held about $2.5 billion in Sears debt as of September, the result of multiple attempts to keep the chain afloat.

Negotiations over the fate of the fallen company continued over the past week, as it faced a critical $134 million of debt that is maturing today.

So, after killing the 132-year-old company, Lampert stands to make millions from its demise. And 68,000 people will soon be out of work.

Update: Crain's has an obituary.

Oh, Sears. You've come to represent much that is wrong with American corporate culture, especially a CEO who embodies the Dunning-Krueger Effect with every syllable he utters.

Crain's Joe Cahill argues that Eddie Lampert, while Sears' proximate cause of death, didn't act alone in its murder:

There's no denying the hedge fund mogul who thought he knew more about retailing than the retailers made critical errors that turned Sears' struggles into an inexorable decline. But Sears started down the wrong path long before Lampert appeared. And its sad fate isn't so much a story of operational missteps as one of missed opportunity. In short, Sears chose to imitate Walmart when it should have tried to pre-empt Amazon.

Like so many established companies threatened by newcomers with innovative business models, Hoffman Estates-based Sears tried to beat the interlopers at their own game, rather than looking ahead to the next big thing. The company that recognized the potential of railroads to support a nationwide retail operation and foresaw that postwar suburban sprawl and shopping malls would redefine retailing for a new generation failed to appreciate the implications of internet technology for the industry it dominated for more than a century.

As for Lampert, he showed no better vision than his predecessors. When he took control of Sears by merging it with Kmart, the combined company still had an opportunity to carve out a strong presence in e-commerce. Amazon had already emerged as the leading internet retailer, but with $8.49 billion in 2005 revenue, it was one-sixth the size of Sears, and barely profitable.

Meanwhile, two other Crain's stories outline the thousands of other victims of this crime: the company's pensioners and all of the malls about to lose their anchor tenants.

Press reports reckon the company has less than 48 hours to live.

Crains is reporting this morning that Sears has hired bankruptcy advisors and could file in the next couple of days:

[S]taffers of the advisory firm, New York-based M-III Partners, have been observed at the troubled retailer's Hoffman Estates headquarters in recent days. Sears, meanwhile, continues to evaluate other options that could still avert a trip to Bankruptcy Court.

Separately, Sears added restructuring expert Alan Carr to its board of directors as the company faces critical debt repayments and looks to overhaul its borrowings, the company said earlier today.

Carr is CEO of restructuring advisory firm Drivetrain and has over 20 years of experience with financially distressed companies as both an investor and an adviser, according his firm’s website. Before his current role, he was a distressed-debt and private equity investor at Strategic Value Partners.

Thank you, Eddie. You've done a man's job killing one of Chicago's oldest brands.

After Eddie Lampert refused to advance any more cash to his failing retail chain, Crain's editorial board concluded Sears may be about to file for bankruptcy protection:

Tracking the slow-motion collapse of what used to be Sears Roebuck has been sort of like watching a glacier melt: You know it's happening, but it's tough to detect it with the naked eye. That is, until a Delaware-size chunk breaks off, which is what happened when the once-giant retailer recently unveiled a "liability management" plan crafted by Sears Holdings' CEO and largest shareholder, hedge fund tycoon Edward Lampert.

Of course, Crain's has lovingly maintained a decades-long tradition of predicting Sears' demise, and there's no telling if or when the company might ever seek bankruptcy protection. But bankruptcies, like avalanches, tend to happen quickly once they're triggered, and it's difficult to see how Sears can maintain its current course—shredding roughly $1.5 billion in cash each year to fund its business operations—without something big giving way, and suddenly.

We shall see. Whatever happens, it's almost a crime. But I've been saying that for years.

Long-time readers know how much I hate what Eddie Lampert has done to Sears (recent example here). Now, apparently, even he thinks the company is done for:

Edward Lampert's proposed debt reduction plan for Sears Holdings is noteworthy for what it doesn't include: any commitment of new funds from the hedge fund mogul/CEO himself for the floundering retailer he has controlled since 2005.

That may be why the plan landed with such a thud on Wall Street. Sears stock tumbled 7 percent after Sears disclosed Lampert's proposal Monday, retraced some ground to close off 2 percent, and then fell another 5 percent early Tuesday. At $1.17 per share late yesterday, Sears was down about 99 percent over the past decade.

Investors have come to expect Lampert to underwrite continuing losses at Sears, which has lost a total of $6.8 billion since 2013. Lampert and affiliates advanced Sears more than $2 billion in the past few years.

Lately, however, Lampert seems to have lost his appetite for Sears IOUs. Now he's more interested in Sears' assets, floating a $400 million offer for the Kenmore appliance brand in August. Even that proposal was nonbinding and contingent on Lampert finding a third party to finance the buyout. In other words, the billionaire isn't willing to risk his own money on Kenmore.

You know the old story: you broke it, you bought it. In this case those things happen cyclically. I think we're finally reaching the end, though.