Sears Holdings was granted a new lifeline on Thursday as its sale to Chairman Eddie Lampert, through an affiliate of his hedge fund ESL Investments, was approved by a federal bankruptcy court judge.
ESL has said the $5.2 billion deal to buy the company will save 425 stores and roughly 45,000 jobs. Judge Robert Drain, of the U.S. Bankruptcy Court for the Southern District of New York, said he expects to enter the order on Friday, thereby making it official.
The company, which owns both Sears department stores and Kmart, filed for bankruptcy in October, and Lampert's bid had been the only option that could have saved it. The deal though, has been protested by its unsecured creditors, which have lambasted the deal as a "scheme to rob Sears and its creditors of assets." They have accused Lampert of using his unique position as Sears' longtime chairman, CEO and largest shareholder to orchestrate deals that unduly benefited him.
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In a trial that spanned three days and two courtrooms within the White Plains, New York, courthouse, Drain overheard a litany of concerns from Sears' unsecured creditors, who pointed to potential flaws in ESL's business plan and its previous failures running the retail giant. The creditors attacked the bankruptcy sale that Sears ran as it looked for a buyer and argued that ESL's bid was deficient.
As Drain read his ruling Thursday, he outlined the obligations before him, as laid out by the bankruptcy code. He said he had to determine whether the deal made "good business sense," which the judge said he believed it did. He said the auction process conducted by Sears, though expedited, was fair considering the time-limits imposed by its liquidity constraints. Despite Lampert's unique status as Sears' chairman and largest investor, Drain believes Lampert's acquisition of Sears was thoroughly and independently evaluated by an independent committee appointed for the process.
Drain was unhappy, though, with a letter Lampert sent to the independent committee during the auction, in which Lampert threatened legal action for breach of fiduciary duty after it rejected several of his offers. Drain said, that when notified of that letter, he "made it clear in no uncertain terms that the letter was a mistake and should be ignored by all parties, including those who were handling the sale on behalf of the debtor." He said he believed his advice had been heeded.
As Drain closed his ruling, he addressed Lampert directly, though the reclusive billionaire was not in attendance, opting instead to listen by dial-in from his office in Bay Harbor Islands, Florida.
Lampert's mysticism, combined with the magnitude of Sears' fall and the finger-pointing that has accompanied it, has set the groundwork for the "verbal abuse" Drain believes Lampert has been subject to. In addition to the accusations lobbed by the company's unsecured creditors during the course of Sears' bankruptcy, Lampert has also been a target of presidential candidate Sen. Elizabeth Warren, angry former Sears' workers, as well as retail pundits. He has been accused of not only making decisions that led to the retailer's troubles, but doing so with an intent to profit from them.
With Sears' revival, said Drain, Lampert "has the opportunity not to be a cartoon character ... he should do that."
The judge urged Lampert to continue to have a clear communication process with the company and its employees as he guides the emerged business.
Missed plans, uncertain future
Lampert's previous missteps, communicating and otherwise, were well documented over the course of the trial. Lampert merged Sears and Kmart in 2005, and both companies have tumbled since then. The combined company has not turned a profit since 2010.
"I do recall us missing our plan for every year when I was on the board," conceded Kunal Kamlani, president of ESL, who has served on the board since March 2016.
Kamlani outlined the vision the company has for its resurgence, echoing papers ESL filed with the bankruptcy court last week. It plans to build out smaller stores focused on selling its most popular products like appliances and mattresses. It expects to improve its performance by only running 425 of its profitable stores, rather than the roughly 700 stores — some of which were money losing — that were open when it filed for bankruptcy in October.
When Drain inquired whether a smaller footprint also meant for decreased operating clout with suppliers, Sears Chief Financial Officer Rob Riecker said he believed a smaller scale will help the company "optimize" its inventory, rather than "starving" its unprofitable stores.
Drain made clear during the course of the hearing he was well aware of the uncertainty pertaining to Sears' future viability. That uncertainty however, did not appear strong enough to override a deal that would have saved 45,000 jobs.
"Whether it's a company that used to print educational books or used to sell plus-sized clothes, the internet has changed everything – and any projection is more in doubt than a projection you would have had 15 years ago or 10 years ago," said Drain, seemingly referring to the bankruptcies of Houghton Mifflin and Fullbeauty, respectively.
He also acknowledged another continued uncertainty: the litigation unsecured creditors have lodged against Lampert for deals he did under his tenure as Sears chairman, CEO and largest shareholder. The unsecured creditors believe that Lampert unduly benefited from deals that include Sears' spinoff of Lands' End in 2014 and transactions with Seritage Growth Properties, a real estate investment trust Lampert created through some Sears' properties a year later.
Lampert tried multiple times throughout the bankruptcy auction to secure a release from those claims as part of his deal to buy the company. The independent committee overseeing the auction rejected those efforts.
What happens to the employees?
Over the course of the trial, the unsecured creditors seeking to block the sale attracted nearly as much attention from Drain as did the merits of sale itself.
The company's unsecured creditors included mall-owner Simon Property Group, which could arguably benefit from Sears' liquidation by replacing Sears stores with more profitable tenants. Simon placed liquidation bids for select Sears stores when it ran its bankruptcy auction. It also includes vendors and the Pension Benefit Guaranty Corp., the federal government oversight organization that guarantees Sears' pensions, which is more than $1 billion underfunded.
Testimony from group's financial advisor, Houlihan Lokey's Saul Burian, took an unanticipated turn on Wednesday after Burian detailed why a financial analysis comparing the liquidation of Sears and Toys R Us was flawed. Drain turned the tables on Burian, shifting his focus from valuation to jobs.
"What happened to the employees of Toys R Us?" Drain asked. Toys R Us liquidated its business last year, effectively terminating roughly 33,000 jobs.
Burian acknowledged that in liquidation, workers in support functions may have a very hard time finding other employment.
"It will be difficult on those families, and there will be a period of time when there's uncertainty," he said.
"You haven't analyzed how many of those people live week to week on their salary or you don't care," Drain retorted.
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