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Take-Aways from the Sears Sale Process
As widely reported, the downfall of Sears was a slow-motion train wreck. The company had lost $10 billion since 2012 and closed 700 stores in the last two years. The Sears Chapter 11 sales process involved a complicated auction structure designed to sell several different types of assets including stand-alone businesses, and real estate. Despite its unique size and complexity, however, some of the strategies and techniques used by the stakeholders in Sears can be applied in cases of any size.
Background
For several years prior to the Chapter 11 filing, Sears engaged in a series of “financial engineering” moves including stock buy-backs, spin-offs of assets such as the “Land's End” brand, and transfers of substantial amounts of real estate to Seritage Growth Properties, a REIT. Throughout that time period, Eddie Lampert, through his fund ESL Investments, Inc. and other affiliates (collectively, ESL) extended secured credit to Sears and when the bankruptcy case was finally filed, ESL held claims exceeding $6 billion.
After the Chapter 11 filing by Sears, ESL made the only “going concern” bid for the assets, which would keep 450 Sears stores operating and preserve thousands of jobs. The bid, which included a cash component and a credit bid of approximately $5.3 billion, was based upon ESL's secured claims. The secured claims were the subject of a potential objection by the unsecured creditors' committee (UCC), but more on that later. The only other bid for the same assets was an untenable liquidation bid made by a group of liquidators.
Ultimately, no other bidder emerged, and the auction turned into a three-day, round-the- clock negotiation between Sears, ESL and the UCC. The points of contention included: 1) whether immediate liquidation was in the best interests of creditors; 2) how to value the ESL credit bid when the underlying secured claims were subject to an objection, and 3) whether ESL should pay for some of the administrative costs and priority claims of the Chapter 11 case during the negotiation process, and as part of its going concern bid?
The UCC Committee's View
It's not surprising that no other “going concern” bid was made, given the deteriorated state of the business, ESL's enormous credit bid, and the relatively short time period allocated for the sale process. Consequently, there was no competitive auction and the sale to ESL was a forgone conclusion from the start; the only question was the price and the extent of the releases. Obviously, there were never going to be many bidders willing to take on 450 money-losing Sears stores and bid against a billionaire with a $5 billion credit bid in hand.
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