Sears gets out of bankruptcy alive

Sears Holdings announced that 39 Sears locations and 64 Kmart stores will be closed.

Sears lives.

Bankruptcy Court Judge Robert Drain approved the sale of most of the retailer’s assets to a hedge fund controlled by Eddie Lampert, the company’s chairman, for $5.2 billion. The decision will keep 425 stores open and save the jobs of about 45,000 employees.

In his decision Thursday afternoon, Drain rejected arguments from a committee of creditors, including landlords and major vendors, who had urged the court to shut the company down and liquidate the assets. The creditors, who are owed more than $3 billion by Sears, argued that closing the company was the best way to return the most money. Those creditors will now have to wait to find out how much they get of the money they are owed, but it is likely to be pennies on the dollar in many cases.

Creditors also argued the sales process was unfair and set up so that no one other than Lampert could buy the most valuable assets of the company.

Attorneys for Sears and Lampert maintained the sales process was fair and that keeping the company open would be better for all involved.

Drain sided with Sears and Lampert, taking about 90 minutes to read his decision from the bench in White Plains, New York. It included a point-by-point rebuttal of the creditors arguments.

“I conclude the process here was proper and appropriate,” he said.

Final arguments on Sears’ future

Drain’s decision capped three days of hearings. Lawyers for the two sides made final arguments Thursday morning ahead of the decision.

Ray Schrock, the lead bankruptcy attorney for Sears, argued that the proposal to liquidate would not raise more money than a sale, as claimed by the creditors. He said dumping so many stores and other assets onto the market at the same time would reduce the amount of money that would be raised in liquidation.

“The benefits of the sales process really do outweigh an orderly wind down,” he said.

He also asked Drain to consider the plight of the Sears employees.

Abid Qureshi, an attorney for the creditors, said that his clients were also concerned about the loss of jobs that liquidation would bring, but said Sears’ past troubles cast doubt on how safe the jobs were even with the sale. He predicted more store closings and job losses ahead.

“Liquidation can be the better option,” he said. “It’s not something that anyone wishes for. But sometimes it’s the better result.”

A hurdle to Sears’s survival was cleared earlier on Thursday when Pension Benefit Guaranty Corp., the federal pension watchdog, dropped its objection to the sale. The agency last week took over two underfunded pension plans covering 90,000 Sears retirees and other beneficiaries. It also took over assets in the plan.

The agency had agreed to reduce the amount of underfunding it would ask Sears to cover from $1.7 billion down to $800 million, according to Schrock.

Another sticking point was whether or not Lampert and ESL would agree to assume $166 million in accounts payable owed by Sears for its recent inventory purchases. Attorneys for the creditors suggested without an agreement on the issue the deal should not be allowed to close.

Sears insisted the sales agreement required ESL to assume those payments. ESL’s attorney disputed that but said it could be settled after the sale closes. Drain said he could not rule on the issue Thursday, but suggested that ESL would be forced to assume that debt.

Sears once dominated retail

Sears started 133 years ago and grew to become the largest and most important retailer in the nation. It was the largest private sector employer in the United States in middle of the 20th century. With its network of stores anchoring malls and with its catalog business providing virtually any good a shopper would want, it was at once both the Walmart (WMT) and Amazon (AMZN) of its heyday.

But it has struggled for decades, losing business not only to online rivals but also to big box retailers who offered lower prices and a wider selection of goods. It had lost $12 billion since its last profitable year in 2010 through its bankruptcy filing last October.

Lampert merged Sears and Kmart together in 2005, when the two brands had 3,500 US stores and more than 300,000 employees between them.

The company that will emerge from the bankruptcy proceedings will be a shell of its former self.

There will be many states in Middle America where one or both stores will not be found. And Sears has indicated in its filings that it expects to transition out of large stores of about 160,000 square feet to stores less than one-tenth that size. And the company’s business plans, filed with the bankruptcy court, suggest that future store closings and real estate sales could be on the horizon.

Lampert has made several statements throughout the process that he believes the smaller Sears, without the unaffordable levels of debt, will be a profitable and competitive retailer.

“We believe in the potential to create a successful, multi-faceted, 21st century company that can benefit from the changes in today’s retail environment,” said a statement from his hedge fund earlier this month. “We intend for the new company to operate as many Sears and Kmart stores as reasonably possible.”

But even escaping bankruptcy doesn’t assure Sears’ long term success.

Recent history is marked by chains emerge from bankruptcy only to file a second time in relatively short order, closing as a result. Gymboree and RadioShack are both recent examples of those trends.

 

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