Debunking Sear’s eleventh-hour rescue plan

New York - Sears’ chairman Eddie Lampert reached a deal with Sears early this month to acquire 425 Sears stores and other assets for about 5.2 billion dollars after winning a bidding process. Lampert’s ESL Investments will put 850 million dollars into a new asset-based loan, according to a regulatory filing last from January, 18.

"We are pleased to have reached a deal that would provide a path for Sears to emerge from the Chapter 11 process," the restructuring committee for the Sears board said in the release. "ESL has been steadfast in its commitment to Sears because we believe that its emergence from Chapter 11 as a going concern is the best path for the company, its associates and the many communities touched by Sears and Kmart stores," according to the statement.

It’s noteworthy that the bid will save 45,000 jobs and pay 43 million dollars toward severance costs. "Importantly, the consummation of the transaction would preserve employment for tens of thousands of associates, as well as the relationships with many vendors and suppliers who provide Sears with goods and services."

Sears will additionally assume up to 166 million dollars of payment obligations for inventory ordered before the deal closes and 139 million dollars of payment owed to vendors and suppliers. Another 35 million dollars will be released from some legal liabilities.

How ESL’s bid will help Sears re-finance its debts

The deal also means that ESL will pardon the 1.3 billion dollars debt it currently holds. Another 621 million dollars of existing senior debt will be rolled over to the post-bankruptcy company, revealed last Friday’s regulatory filing. Once exited bankruptcy, the new company will assume 592 million dollars of other liabilities tied to Sears entities.

Bank of America, Citigroup and Royal Bank of Canada have committed financing for the asset-based loan. Lampert is also receiving real estate mortgage financing from hedge fund Cyrus Capital Partners, which has extensive ties to Sears, reports Bloomberg.

Still, the deal could be put on freeze or even be terminated if it hasn't been approved in bankruptcy court by February, 8 or if the transaction hasn't closed by February, 19.

What’s next for Sears? Mixed welcome to Lampert’s rescue

Although the company shared their relief via corporate release as soon as the filing was made public, there are still doubts regarding this rescue plan.

For example, Sears didn’t disclose any information about whether the bid releases Lampert from legal liability over previous deals he did with the company. As a matter of fact, this is the latest in Lampert's attempts to turn the company around. He’s credited with engineering the 12.3 billion dollars acquisition of Sears by Kmart in 2005, as well as with cutting more than 1 billion dollars in annual expenses, the sale of real estate, and the offloading of the Craftsman tools business and clothing unit Lands' End Inc.

Yet these accomplishments weren’t always well received. The company’s unsecured creditors have complained about Lampert’s deals arguing in documents filed with the Southern District of New York Bankruptcy Court that they have uncovered facts that demonstrate Sears’ downfall was “precipitated by years of misconduct by Lampert, ESL, and others against Sears and its creditors,” in addition to the broader challenges facing the retail industry.

“This is a matter of significant public interest and should be heard entirely in open court,” the committee wrote. A hearing is scheduled for February, 1 at the bankruptcy court in White Plains, New York, at which the bankruptcy judge overseeing the case, Judge Robert Drain, will assess the merits of any objections. In response, Lampert argued that the deals were properly crafted and kept the chain alive.

Meanwhile, the market keeps talking: Lampert now faces the challenge of returning a slimmed-down version of the company to profitability after billions of losses under his management. If he is successful, said in a note to market Christina Boni, an analyst at Moody's Investors Service, "the retailer could stagger on for longer as a going entity." "However, in our view, the company will continue to be hobbled by the same untenable problems, given that its efforts to resuscitate performance by shrinking has mainly been unsuccessful."

Image:Sears e-commerce site