SHLDQ Sears Holdings Corporation (CE)

By Suzanne Kapner, Lillian Rizzo and Soma Biswas 

Billionaire Edward Lampert won a bankruptcy auction for Sears Holdings Corp., keeping the struggling department store chain from shutting all its remaining stores, according to people familiar with the matter.

Mr. Lampert, a hedge-fund manager who steered Sears into bankruptcy, prevailed by sweetening his offer to about $5.3 billion from $4.4 billion over several weeks of negotiations with Sears's board and creditors, the people said.

His last-ditch rescue plan would keep roughly 400 stores open. The offer beat out a bid, which was supported by most Sears creditors and landlords, by Abacus Advisory Group LLC to close all the stores and sell the inventory. Reuters earlier reported Mr. Lampert had prevailed.

Sears's longtime leader, who is also its largest creditor and biggest shareholder, has scrambled to retain control of the company since it filed for protection from creditors in October. He stepped down as chief executive at the time but remained chairman.

The rescue plan must be approved by the bankruptcy judge at a sale hearing set for Feb. 1 in White Plains, N.Y.. Judge Robert Drain, who is overseeing the case, had pressed Mr. Lampert to reach a deal to keep some stores open and save thousands of jobs, one person said. Some creditors still object to Mr. Lampert's plans and prefer a total liquidation, this person added.

With more than $7 billion in assets when it filed for chapter 11, Sears is one of the biggest in a string of recent U.S. retail bankruptcies. The company, which also runs the Kmart chain, has already closed about 200 of the roughly 700 stores it had when it filed for protection.

The agreement, reached in early-morning hours Wednesday, capped a tense day of negotiations. By 11 p.m. Mr. Lampert's offer appeared dead, the people said.

The two sides, huddling in neighboring conference rooms at the New York law office of Weil, Gotshal & Manges, continued talking until about 2 a.m., when Mr. Lampert raised his offer by a $150 million, cinching the deal, the people said.

One of the issues complicating the negotiations is that Sears continues to burn through cash at a rapid rate, one of the people said.

The deal releases Mr. Lampert and others from liability over future lawsuits related to a series of spinoffs that creditors say might have siphoned valuable assets away from the company, the people said. Mr. Lampert has repeatedly denied those accusations.

The agreement also includes about $1.3 billion in debt forgiveness to Mr. Lampert's hedge fund, ESL Investments Inc., which raised further objections from creditors.

The 126-year-old Sears was once the dominant retailer in America. It will emerge, though, from bankruptcy as a shadow of its former self, making it difficult to compete against healthier chains with thousands of locations apiece -- such as Walmart Inc. and Home Depot Inc. -- as well as with the omnipresent Amazon.com Inc.

"I don't know what's left to shop there for," said Patrick Garrett, a retired consultant. Ever since the Sears near his home in Calabasas, Calif., closed in November, he has visited Lowe's Cos. for Craftsman tools, Best Buy Co. for appliances and J.C. Penney Co. for clothes. "I'd have to drive 40 miles to get to the nearest Sears now," the 70-year-old said.

Retailing has become a game of scale to cover the fixed costs of operating stores, warehouses, e-commerce sites and a supply chain that knits them all together. Sears, by contrast, has been shrinking for years by closing stores and shedding businesses and brands, including the Lands' End Inc. clothing brand and Craftsman tools.

At its peak in 2006, a year after Mr. Lampert took control by merging Kmart and Sears, the company operated more than 2,300 stores. In October, it entered court protection with fewer than 700 locations and had racked up seven years of losses. Annual sales had shriveled to $16.7 billion, down from $49 billion in 2005.

At the time of the Kmart merger, Mr. Lampert was a Wall Street hotshot who was often compared with legendary investor Warren Buffett. The downfall of Sears hasn't only damaged the company's reputation, but Mr. Lampert's as well.

Now, he has what might be his final chance to prove that his contrarian strategy is the right one. He has long argued that as retailing moves online, chains need fewer big-box stores. His mantra for Sears is to turn it into an "asset-light" company.

Yet, there are few precedents of big retailers shrinking their way to prosperity. A rare exception is Federated Department Stores Inc., which filed for bankruptcy protection in 1990 as part of Campeau Corp., emerged and went on to swallow up rivals to become the current Macy's Inc.

"Sears is so far below critical mass," said Steve Dennis, a consultant and former Sears executive, who left the company before Mr. Lampert took control. "What is it about having fewer stores -- which doesn't allow you to spend as much on marketing or have supply-chain efficiencies -- that suddenly makes it a successful strategy?"

In recent years, chains such as Toys 'R' Us Inc., Sports Authority Inc., Bon-Ton Stores Inc. and RadioShack disappeared after filing for bankruptcy protection. Others such as Mattress Firm Inc. and Payless ShoeSource have re-emerged from bankruptcy after shedding debts and shutting hundreds of stores.

Mr. Lampert also is buying the Kenmore and DieHard brands, the company's Sears Auto Centers and its Home Services business, along with inventory, intellectual property and other assets. The rescue plan will save as many as 50,000 jobs.

"Our proposed business plan envisages significant strategic initiatives and investments in a right-sized network of large format and small retail stores, digital assets and interdependent operating businesses," Mr. Lampert wrote in a Dec. 28 letter to Sears's financial advisers. "We believe that our strategy will enable Sears to prosper in an integrated consumer and retail landscape."

The hedge-fund manager raised his offer by $600 million last week to about $5 billion. The revised offer included no new cash but promised to assume liabilities that could drive the retailer further into debt. It also included an additional 57 real-estate properties as well as accounts receivable and inventory.

Not everyone views Sears as a lost cause. Some of its surviving stores are in healthy malls, and other locations in rural areas are facing less competition as rivals have closed stores or gone out of business. But big changes need to happen to make Sears viable, analysts say.

"We think there is a path for them to survive, but they've got to dump apparel and devote the whole store to hard lines," said Craig Johnson, the president of consulting firm Customer Growth Partners. "Sears still has a lot of credibility in appliances, and they can rebuild that business."

Former executives say that idea was considered years ago but deemed unfeasible, because consumers purchase big-ticket items such as appliances too infrequently. It would also be dependent on Sears's ability to reduce the size of its stores, something it has been trying to do by leasing excess space to grocery stores and competing retail chains.

A blueprint for the company's future could lie with a remodeled store in Oak Brook, Ill., that opened in October. At 62,000 square feet, it is about one-third of its original size. The shrunken store no longer sells consumer electronics and jewelry, although most other product categories are available.

Perhaps a bigger stumbling block to Sears is Mr. Lampert himself. Although he has poured money into the company through short-term loans and said he has tried to do everything to keep it afloat, his contrarian approach to running the retailer -- including a reticence to upgrade stores without the promise of a return on that investment -- has proven disastrous.

"Any model with Eddie involved is a no-go," Mr. Johnson said.

--Patrick Fitzgerald contributed to this article.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com, Lillian Rizzo at Lillian.Rizzo@wsj.com and Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

January 16, 2019 11:06 ET (16:06 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.