Sears just sold its last asset that had any real value. Trouble ahead?
The retailer received $2.7 billion in a sale of 235 Sears and Kmart locations to Seritage, a newly public REIT, but those were its last assets of any real value.
by Richard Collings
The $2.7 billion Sears Holdings Corp. (SHLD) has received from completing the sale of 235 Sears and Kmart locations to a newly public REIT will buy the troubled retailer about 30 months of liquidity, but it's also the last asset the company had to sell that carried any real value.
Sears announced on July 7 that it received the $2.7 billion from Seritage Growth Properties (SRG), which began trading publicly on Monday.
The sale of real estate by Hoffman Estate, Ill.-based Sears also included 50% stakes in separate joint ventures with Simon Property Group Inc. (SPG), General Growth Properties Inc. (GGP) and Macerich Co. (MAC).
The $2.7 billion in proceeds will be used to help the department store operator continue its turnaround as it transitions to an asset-light model.
The cash is badly needed, with Sears burning through more than $1 billion a year. Robert Schriesheim, Sears' CFO, wrote in a Dec. 5 blog post on the retailer's website that the company's annual cash burn might be reasonably pegged at about $1.06 billion.
Seritage was able to fund the purchase of the real estate with the $1.6 billion raised from the successful rights offering by Sears on July 6 to its shareholders for shares in the REIT. The remainder of the $2.7 billion Seritage paid was likely to have been financed with debt, which Sears previously said was likely.
But while the cash will temporarily shore up the finances of a retail giant bleeding cash, it is Sears Holdings' last asset that retains any real value.
If Sears Holdings were to run out of cash at this stage, nothing is left to liquidate to keep its operations afloat, according to industry observers tracking the company.
Investors just over the past few trading days have bid Sears' shares down from $25.53, where the stock traded as of July 2. On Wednesday, Sears closed at $24.13, down 4.78% from Tuesday's $25.34 finish. The lack of investor confidence is not surprising, considering Sears' liabilities, which include not only debt, but also unfunded pension obligations.
Sears Holdings had $286 million in cash on its balance sheet as of May 2, according to a Form 10-Q filed with the Securities and Exchange Commission on June 8, as well as a total of $3.88 billion in debt.
The debt includes $104 million in unsecured commercial paper and $200 million on secured short-term loan from affiliates of the hedge fund ESL Investments Inc., which Sears chairman and CEO Edward Lampert controls.
Sears also has $1.2 billion in outstanding 6.625% second-lien notes due Oct. 15, 2018, and $625 million in 8% senior unsecured notes due Dec. 15, 2019. In addition to the debt, Sears has about $2.3 billion in pension obligations.
Meanwhile, Sears has leased back a majority of the properties it has sold to Seritage as part of the transaction.
"By separating a portion of Sears Holdings' real estate portfolio into a new, publicly traded company, and leasing back the space, we are substantially enhancing Sears Holdings' financial flexibility and significantly transforming our capital structure toward one that is more flexible, long-term oriented and less dependent on inventory and receivables," said Lampert in a statement.
