SHLDQ Sears Holdings Corporation (CE)

As previously disclosed, on October 15, 2018 (the “Petition Date”), Sears Holdings Corporation (the “Company”) and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”).

On January 17, 2019, the Company and certain of its subsidiaries (collectively, the “Sellers”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Transform Holdco LLC (“Buyer”), an affiliate of ESL Investments, Inc. (“ESL”), pursuant to which Buyer agreed to acquire substantially all of the go-forward retail footprint and other assets and component businesses of the Company as a going concern (the “Going Concern Transaction”) following the conclusion of an auction at which the Going Concern Transaction was determined to be a successful bid pursuant to the Global Bidding Procedures approved by the Bankruptcy Court (the “Bidding Procedures”). Edward S. Lampert, Chairman of the Board of Directors of the Company (the “Board”), is also the Chairman and Chief Executive Officer of ESL. Kunal S. Kamlani, a member of the Board, is also the President of ESL. The Going Concern Transaction was approved on behalf of the Company by the independent Restructuring Committee of the Board. The Bankruptcy Court hearing to consider the approval of the Going Concern Transaction is scheduled to commence on February 4, 2019 at 10:00 a.m. (Eastern Time) and the Company understands that the Official Committee of Unsecured Creditors intends to object to the approval at such hearing.

All capitalized terms used and not defined in this Current Report on Form 8-K (this “Form 8-K”) have the meanings ascribed to them in the Purchase Agreement, a copy of which is filed as Exhibit 2.1 to this Form 8-K.

Assets and Consideration

The Going Concern Transaction involves the sale of the following assets by the Sellers:

The consideration in the Going Concern Transaction will be comprised of the following (in connection with which the Buyer has paid a deposit of $120 million):

The Purchase Agreement also provides that Buyer will provide offers of ongoing employment to approximately 45,000 employees of the Company and its subsidiaries, and through February 1, 2020, the end of the Company’s 2019 fiscal year, provide salary continuation, substantially comparable benefits and reinstate the Company’s prepetition severance program for all employees that accept their employment offer at close.

Financing

The obligations owed under the DIP Credit Agreement will be refinanced with $850 million in cash to be funded with the proceeds of a new ABL facility by and among the Buyer, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith

Incorporated, Citigroup Global Markets, Inc. and Royal Bank of Canada and the other lenders party from time to time thereto. In addition, the Purchase Agreement contemplates a roll-over of $621 million of indebtedness (including $350 million of the amounts owed under the Junior DIP Term Loan and approximately $271 million of the Citi L/C Facility) into exit facilities of Buyer.

Conditions to Closing

The Buyer’s and the Sellers’ obligations to consummate the Going Concern Transaction under the Purchase Agreement are subject to certain conditions contained therein, including, among other conditions, conditions relating to the accuracy of the parties’ respective representations and warranties made in the Purchase Agreement; the performance of the parties’ respective pre-closing covenants; the absence of a legal impediment to the closing of the Going Concern Transaction; the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act applicable to the Going Concern Transaction; the entry of an order by the Bankruptcy Court approving the Going Concern Transaction; the occurrence of certain actions with respect to KCD IP, LLC and the KCD IP; KCD IP, LLC having not voluntarily filed for bankruptcy; the Sellers owning at least $1.657 billion of certain inventory and receivables; and there being no more than $850 million outstanding under the DIP Credit Agreement and no more than $350 million outstanding under the Junior DIP Term Loan, exclusive of any accrued and unpaid interest thereunder.

Anticipated Timeline

Sellers and Buyer will use reasonable best efforts to obtain the approval of the Bankruptcy Court on or before February 8, 2019 and to close the Transactions on or before the outside date of February 19, 2019.    

Termination

The Purchase Agreement can be terminated by the Sellers or Buyer if, among other things, (i) the Bankruptcy Court has not approved, and entered an order approving, the consummation of the Going Concern Transaction on or before February 8, 2019 (subject to Bankruptcy Court availability), (ii) the closing of the Going Concern Transaction has not occurred by 11:59 p.m. (New York City time) on February 19, 2019 (the “Outside Date”), or if the Sellers accept or agree to any Competing Transaction (as defined in the Bidding Procedures) or upon approval by the Bankruptcy Court of, or the filing by or on behalf of any Seller of a motion or other request to approve, a Competing Transaction (as defined under the Purchase Agreement).

No Assurance

There can be no assurance that the Bankruptcy Court will approve the Debtors’ entry into the Purchase Agreement, that the conditions to Buyers’ and the Sellers’ obligations to consummate the Going Concern Transaction under the Purchase Agreement, will be satisfied prior to the Outside Date or that any of the transactions comprising the Going Concern Transaction will be consummated on the terms set forth in the Purchase Agreement or at all.

The foregoing description of the Purchase Agreement and the Going Concern Transaction does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Purchase Agreement, which is filed as Exhibit 2.1 to this Form 8-K and incorporated by reference herein. The Purchase Agreement has been included to provide investors with information regarding its terms and is not intended to provide any other factual information about the Sellers, Buyer or ESL. The representations, warranties and covenants contained in the Purchase Agreement were made only for purposes of such agreement as of the specific dates therein, were solely for the benefit of the parties to the Purchase Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Purchase Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. For the foregoing reasons, the representations, warranties and covenants should not be relied upon as statements of factual information.

Forward-Looking Statements

This Form 8-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this filing that address activities, events or developments that the Company expects, believes, targets or anticipates will or may occur in the future are forward-looking statements. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain risks and other factors, which could include the following: the failure to obtain approval of the Purchase Agreement by the Bankruptcy Court or, if the Purchase Agreement is approved by the Bankruptcy Court, to consummate the

Going Concern Transaction, risks and uncertainties relating to the Chapter 11 Cases, including but not limited to, the Company’s ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases, the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, the length of time the Company will operate under the Chapter 11 Cases, risks associated with third-party motions in the Chapter 11 Cases, the potential adverse effects of the Chapter 11 Cases on the Company’s liquidity or results of operations and increased legal and other professional costs necessary to execute the Company’s reorganization; the conditions to which the Company’s debtor-in-possession financing is subject and the risk that these conditions may not be satisfied for various reasons, including for reasons outside of the Company’s control; the impact of and ability to successfully implement store closures; the Company’s ability to consummate sales of assets and the terms and conditions of any such sales, including the “Go Forward Stores”; the Company’s ability to implement operational improvement efficiencies; uncertainty associated with evaluating and completing any strategic or financial alternative as well as the Company’s ability to implement and realize any anticipated benefits associated with any alternative that may be pursued, including the asset sales and wind down of operations; the consequences of the acceleration of our debt obligations; trading price and volatility of the Company’s common stock and the risks related to the Company’s delisting from Nasdaq and trading on the OTC Pink Market; as well as other risk factors set forth in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. The Company therefore cautions readers against relying on these forward-looking statements. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and, except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.