Why Did Sears Holdings’ Largest Outside Shareholder Suddenly Jump Overboard?

by Wolf Richter, WolfStreet:

4th director to quit in 10 months. Bankruptcy prospects heat up. 

The board of directors of Sears Holdings keeps shrinking – and that makes sense: Who’d want to be a director as the retailer careens along its path to bankruptcy, it only being a question of when it’ll get there, and whether or not the company will make it through the holiday selling season.

Today the company announced that Bruce Berkowitz “has decided to step down” from the board of directors, effective October 31, 2017. He’d joined the board in February 2016. So that wasn’t long. No reason was given for the abrupt departure, which caused bankruptcy fears to flare up, and shares (SHLD) plunged 11.5% to $5.99.

Berkowitz is the fourth director to jump overboard over the past 10 months and none has been replaced. The other three:

  • Steven Mnuchin quit the board in December ahead of his appointment as Secretary of the Treasury. He’d been on the board for 12 years. The vacant slot has not been filled.
  • Alesia Haas quit the board in December 2016 after having joined in February 2016 – just long enough to get a look-see before bailing out. She’d been the CFO of OneWest Bank until it was acquired by CIT group.
  • Cesar Alvarez quit the board in March 2017. He’d joined in December 2013. At the time, he was co-chairman of the law firm Greenberg Traurig. His slot has not been filled.

This leaves only six directors, including CEO and hedge-fund manager Eddie Lampert, down from 10 in February 2016.

But Berkowitz is very special. He is the Chief Investment Officer of Fairholme Capital Management, the largest outside holder of Sears Holdings’ shares (insiders Lampert and his hedge fund ESL remain the largest owners). In its Form 13F filing with the SEC on August 14, Fairholme disclosed that it owned 28.86 million shares of Sears Holdings, or 27% of the total shares outstanding!

Fairholme Capital is a beaten-down investment fund. It had peaked in 2011 with $20 billion in assets. According to its Form 13F, filed in August, the fund’s equity positions were down to 9 holdings worth $982 million.

Among the nine positions were the following goodies:

Sears Holdings, 28.86 million shares, valued at the time at $255.7 million – or $172.9 million at today’s closing price.

Sears Holdings warrants, 6.7 million warrants to expire Dec. 15, 2020

Land’s End, 2.855 million shares. The company was spun off from Sears in 2014. At the time, those shares traded at $30.50. They’re now at $12.50.

Sears Canada, 21.56 million shares. The company is now in liquidation and its shares are worthless.

Sears Hometown & Outlet Stores, 77,850 shares, which plunged 9.5% today to $1.90. They’re down 95% since the summer of 2014.

Seritage Growth Properties 159,710 shares. The company owns 235 former Sears and Kmart properties. Its shares fell 3.4% today, on concerns that Sears was unraveling faster than expected, and that the math might not work out quite as well as expected.

What math?

Lampert is chairman of Seritage, which was spun off via a rights offering from Sears Holdings. The $2.6 billion deal transferred 235 Sears and Kmart properties from Sears Holdings to Seritage. The transaction closed in July 2015. Most of the stores were leased back to Sears Holdings. Since then, Sears Holdings closed a number of these, and Seritage leased the properties to new tenants at much higher rates.

The deal didn’t pass the smell test, with Lampert gallivanting around on both sides of it. Sears and Lampert were sued by individual investors who’d alleged that he controlled Seritage and had benefited from the deal by spinning off Sears’ most valuable locations for a pittance, to the detriment of Sears’ shareholders. In February 2017, Sears Holding and Lampert agreed to settlethe suit for $40 million.

The fact that the Seritage deal closed in July 2015 puts it beyond the fraudulent conveyance provision in the bankruptcy code, which allows for a two-year claw-back period. So now Sears Holdings is free to file for bankruptcy anytime.

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