Long after top sell-side firms ceased covering Sears Holdings Corp. following its merger with Kmart Holding Corp. four years ago, ESL Investments stood pat. And it continues to do so. As of mid-April, the $10 billion Greenwich, Connecticut–based hedge fund firm held close to $3.5 billion in Sears stock, half of the company’s outstanding shares. The position accounts for a quarter of ESL’s portfolio, and it is an asset whose value has dwindled. At a recent price of $53, Sears’ shares are half what they were a year ago.
Although short-sellers have paid as much as a 30 percent fee premium this year to borrow the stock, some seriously staunch believers remain. The undisputed booster in chief is Edward Lampert, who bought into Sears on the cheap in 2005 and today wears two hats — that of founder of ESL and that of chairman of Sears, which, like many retailers, is struggling. At least a couple of factors are in Lampert’s favor. First, Sears plans to repurchase $500 million in stock over the next year, which may help drive the price back up. Second, the company’s traditional downside protection — the real estate value of its roughly 2,300 full-line and 1,200 specialty retail stores — remains intact at some level.
Lampert may be thinking of taking the company private, as hinted at in a recent Deutsche Bank research report. The report also raises the possibility that the sum of individual components of Sears Holdings exceeds the value of the company’s market capitalization. Nevertheless, to buy all outstanding shares, Lampert would need more than $2 billion — hardly chump change, and available today at junk-debt rates of 10 to 15 percent, according to Steve Kaplan, an entrepreneurship and finance professor at the University of Chicago Booth School of Business. Ultimately, Kaplan says, Lampert “made a bad investment and has to make the best of it.”
Lampert’s purchase this year of 400,000 shares of Sears Canada — a better-capitalized business sitting on more than $600 million in cash and a bigger market share than its U.S. counterpart — gives him an almost 75 percent stake in that company. One obstacle to full ownership: William Ackman, CEO of Pershing Square Capital Management, which owns 17 percent of Sears Canada, has resisted efforts by Lampert to buy him out.
