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Sears wants to stay open through Christmas.

Byline: Bloomberg

Negotiations over the fate of Sears Holdings Corp. have moved away from a possible liquidation toward a plan that would keep some stores open through Christmas, according to a person with knowledge of the matter.

The talks with lenders envision a restructuring using the Chapter 11 bankruptcy process, with Sears filing on Sunday at the earliest, said the person.

Negotiators are discussing a loan of about $300 million to $500 million, the person said.

The exact number of Sears stores that would remain open hasn't been finalized, but the intention is to maintain the 125-year-old chain as a going concern, the person said. Almost 90,000 jobs are at stake, according to Sears filings earlier this year.

The department-store chain once ranked as the biggest U.S. retailer, with a reputation built on its money-back guarantee of customer satisfaction. But it wasn't able to keep up with shifting consumer habits as online rivals siphoned off shoppers, and turnaround efforts were hobbled by mountains of debt.

Hanging on

Since 2012, losses at Hoffman Estates-based Sears have piled up, and multiple efforts to steady the company by Chief Executive Officer Eddie Lampert -- sometimes with his own money -- have failed to restore its fortunes. Bit by bit, the smart money deserted Lampert.

Michael Dell, David Geffen, George Soros, the Ziff brothers -- by 2012, all of them, and many more, had peeled away.

Not even Lampert's friends could understand why the hedge-fund manager, once hailed as a young Warren Buffett, clung to his spectacularly bad investment in Sears, a dying department store chain.

Granted, other hedge-fund titans have blown it, from Julian Robertson with US Airways to Bill Ackman with Herbalife. But few have ridden a disaster so publicly, over so many years, with such an iconic brand. It was hubris, many now say, and a failure to follow the investor commandment: get out in time.

Lampert, who lost many millions as Sears Holdings Corp. shares ground down to pennies, kept throwing the company lifelines. From the moment he bought into what was then called Sears, Roebuck & Co., he also maneuvered to protect his financial interests. At times, he even made money.

He closed stores, fired employees and, in what will surely be long remembered as the most unseemly element of the saga, carved out some choice assets for himself.

Until, at last, the reckoning. After 13 years under Lampert's stewardship, Sears finally seems to be hurtling toward bankruptcy, if not outright liquidation. And, once again, Wall Street is wondering what Eddie Lampert will salvage for himself and his $1.3 billion fund, ESL Investments Inc., whose future may now be in doubt.

"He's been doing a lot of financial engineering, but he's just been moving around the deck chairs on the Titanic," said Van Conway, a restructuring expert who worked on Detroit's bankruptcy. "It looks like he's played almost a full deck of cards by now."

For years, bankruptcy court had been accepted by most everyone except Lampert as unavoidable. He refused to give in, proposing a plug-the-holes maneuver just two weeks ago, after years of machinations that kept the basic gears going even as the company was bleeding out.

At 56, he's still a billionaire. A Sears bankruptcy isn't likely to change that for the chief executive officer and chairman.

Under the filing the company is said to be preparing for as soon as this weekend, he and ESL -- together they hold almost 50 percent of the shares -- would be at the head of the line when the remnants are dispersed. As secured creditors, Lampert and the fund could get 100 cents on the dollar, along with others in the protected camp, including Wells Fargo & Co. and Citigroup Inc.

Lampert has maneuvered out of tight spots before, most famously when he persuaded four men who kidnapped him in January 2003 to let him go after holding him for 30 hours, blindfolded and handcuffed, in a motel bathroom. But saving sinking Sears required more than fast-talk.

Plans unworkable

His last idea was a debt restructuring that received little or no support from other creditors, who saw it as a scheme to allow ESL to be paid for Sears' real estate, according to a person with direct knowledge of the situation. Part of this Lampert plan was to have unsecured creditors swap their debt for equity, a fool's trade in the view of most analysts.

There's no question Sears has cost him, and not only in reputation: He saw about $240 million worth of stock that he personally purchased evaporate as the shares tumbled. Another $287 million that he received in compensation has all but disappeared. ESL has lost $65 million just this year.

The hedge fund's assets plummeted to around $1 billion from $15 billion in 2006 as the portfolio shrank from a half-dozen to the one massive crapshoot on Sears. The big-name investors exited, and so did Goldman Sachs clients who had come into ESL as part of a $3.5 billion capital raise in late 2007 and early 2008.

Still, as Sears's major debt holder, with roughly half of the company's $5.3 billion total, ESL saw a bit of upside, extracting more than $200 million in interest payments a year.

And Lampert carved out what looked like -- and in some cases might yet be -- saves for himself, with spinoffs that gave him chunks of equity in new companies. One was Seritage Growth Properties, the real estate investment trust that counts Sears as its biggest tenant and of which Lampert is the largest shareholder; he created it in 2015 to hold stores that were leased back to Sears -- cordoning those off from any bankruptcy proceeding. He and ESL got a majority stake in Land's End, the apparel and accessories maker he split from Sears in 2014.

The Sears Canada Inc. gamble was a fumble; that spinoff began liquidating one year ago. Lampert and ESL together had almost $300 million in that stock and both rode it to zero, though they did pocket $25 million in special dividends. Lampert is the chief shareholder in the Sears Hometown and Outlet Stores Inc., a stock that has tanked along with its former parent.

All those spinoffs robbed Sears of assets when it needed them, said Mark Cohen, a former CEO of Sears Canada and frequent Lampert critic who's an adjunct professor of retail studies at Columbia University. "This completely unconventional way of managing a business might have been an interesting alternative operating strategy were it not for the fact that it has been a colossal failure."

Over the years of propping Sears up, Lampert threw his own money into the effort, and his friends and supporters said this wasn't only in self interest: He wanted to keep the lights on and people employed. He and ESL were willing to lend at much lower rates than others were demanding. He had Sears pay almost $2 billion into the unfunded pension plan in the past five years.

Nothing Lampert won out of Sears's spinoffs was the result of special treatment, said Paul Holmes, a spokesman for ESL. "As we have said previously, the Land's End and Seritage transactions were carried out on transparent terms that delivered value to all Sears shareholders and every shareholder had the same opportunity to participate."

Low-key, and rich

The defeat of a bankruptcy filing won't dull Lampert's passion, according to people close to him. He'll continue to lead his low-key billionaire life, reading, riding his racing bicycles and spending time on his 288-foot yacht. (Lampert named it The Fountainhead, after the 1943 novel by Ayn Rand, whose books glorify individualism and the pursuit of riches.) And looking for deals. It hasn't been unusual for him to walk out in the middle of dinner parties organized by his wife to hunch over his phone or a computer in another room, according to people who have attended the events, and on occasion, he hasn't shown up for the meal at all.

Lampert started ESL -- for Edward Scott Lampert -- in 1988 after three years at Goldman. Richard Rainwater, who oversaw the Bass brothers fortune, staked him $28 million to get going.

By the time he was 43, he was a billionaire three times over. He hit home runs, the most impressive with the auto-parts retailer AutoZone and the car seller AutoNation Inc. His clients saw annualized returns of more than 20 percent after fees until 2001. Even with the Sears fiasco, an investor who has been with Lampert from the beginning would now still be enjoying an annualized return of about 12 percent.

He had what looked like another success on his hands in 2002, when he bought Kmart's unsecured debt for around $700 million. Within two weeks, he'd orchestrated the retailer's exit from bankruptcy and emerged as its biggest shareholder.

Kmart was throwing off cash back then, and Lampert masterminded the merger with Sears. It wasn't immediately a disaster, but losses started piling up.

Sears rolled through four CEOs in eight years, and Lampert took over in January 2013. But he shows up at the Hoffman Estates headquarters only a few times a year. He prefers to beam in from his office in Florida; while he still owns a home in Connecticut he lives most of the time in a $40 million estate on Indian Creek, an island in Key Biscayne that's home to two dozen or so of Miami's uber wealthy.

As he cut costs to the bone, he pitted executives against one another in a battle for scarce resources in a sort of a retail Hunger Games, people who worked for him said. He ruffled feathers by being a micro manager with little interest in heeding the advice of top executives, according to one former high-ranking employee. Another person recalled an uncomfortable conference call during which Lampert cut off one of his own executives, with an investor also on the line, with a quiet but dismissive, "That's idiotic."

Perhaps his biggest misstep was thinking he could power through the recession. He had the opportunity to cancel a massive number of leases on Sears stores in the aftermath of the financial crisis, according to people familiar with the company. Instead, he renewed them.

Rainwater, who died in 2015, had pulled his money out of the fund when Lampert decided to move beyond picking stocks to takeovers and buyouts, thinking the young man wasn't ready. Part of it, Rainwater told The Wall Street Journal in 1991, was what he saw as the downside to Lampert's exceptional drive: "He's so obsessed with moving in the direction he wants to move that people get burned, trampled on, run into."

Those words now seem prophetic.
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Title Annotation:Business wire_
Publication:Daily Herald (Arlington Heights, IL)
Date:Oct 13, 2018
Words:1781
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