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Aug 22, 2018
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In Kenmore sale, Sears' pension liabilities come back to bite

Reuters API
Aug 22, 2018

Sears Holdings Corp is facing a familiar foe in its bid to sell off the Kenmore appliances brand: the U.S. government body that oversees the pensions for the company's 100,000 retirees.


Sears Chief Executive Eddie Lampert's hedge fund, ESL Investments Inc, submitted bids last week of $400 million(313.65 million pounds) and $70 million for Kenmore and the department store's home improvement business, respectively.

ESL hopes to have a final agreement as soon as Aug. 24, which would end Sears' nearly two year search for a buyer. It is unclear if the Sears special committee selling the businesses will accept Lampert's offer.

Lampert's strategy in bidding for the two businesses is to entice another potential buyer to the table, according to a person familiar with his thinking. Barring that, the goal is to help the 125-year-old department store operator continue to fund its operations as it faces a cash crunch, the source said.

But the government agency known as the Pension Benefit Guaranty Corporation (PBGC) plans to use its right to effectively veto the Kenmore sale in order to negotiate a share of the anticipated proceeds from Sears, according to people familiar with the matter who requested anonymity to discuss confidential deliberations.

A spokeswoman for the PBGC declined to comment on the sale of Kenmore, known best for its refrigerators and washer and driers. But she said in a prepared statement, "We continue to monitor Sears' financial situation."
Sears declined to comment.

The PBGC move mirrors its own successful tactic last year with Sears, when it won future cash payments from the company in exchange for agreeing to the sale of Sears' Craftsman tool line.

The PBGC, funded in part by insurance premiums paid by companies, is responsible for covering workers' pensions if their former employer cannot.

When companies face financial distress and are at risk of leaving the agency with a pension funding gap to cover, the PBGC can intervene to protect itself, pushing the employer to contribute more to worker retirements.

The PBGC's stance could jeopardise Sears' efforts to raise money to stay in business. The retailer, which also runs Kmart discount shops, is burning through $1 billion to $1.5 billion annually, according to analysts, as it struggles to compete with online retailers such as Amazon.com Inc and discount chains including Walmart Inc.

Sears has taken other measures to boost cash, inking a $425 million credit card deal with Citigroup Inc in May and selling $290 million in real estate in the first quarter.

Sears cautioned investors last year that it may not be able to carry on as a going concern. The retailer, with $5.2 billion in borrowings on May 5, will aim to keep as much of the cash from the Kenmore sale as it can to help make it through the holiday season, the people said.

Sears retirees' pensions face their own funding shortfall of $1.5 billion.

The PBGC now must strike a delicate balance between squeezing as much cash from Sears upfront as it can to plug its pension funding gap, without pushing the company into bankruptcy and jeopardizing any prospect of future payments as well as the jobs of the company's 89,000 workers, the sources said.

Sears has contributed over $4 billion to its pension over the last decade, but this could be the PBGC's last chance to try to cover the shortfall it faces from Sears.

Following the upcoming wave of divestitures, Sears will be left with assets including its battery label Diehard, roughly 100 Kmart and Sears stores not already used to back debt, and auto centers and home services businesses, a Fitch Ratings Inc analyst and sources said.

If "Sears gets to bankruptcy, there's a chance that all of the choice assets will have already been sold," said Stephen Lubben, a Seton Hall law school professor who specializes in bankruptcy. "The PBGC needs to keep their eye on the sale proceeds."

The value of the remaining businesses and real estate has deteriorated as Sears has struggled to turn a profit, the people said. Sears is now a shadow of its former self, with a market capitalisation of just $132 million, versus close to $30 billion in 2007.

Lampert has invested and lent to Sears many times over the years, making him the company's largest shareholder with a stake just shy of 50 percent, as well as its biggest creditor, with about $2.1 billion owed to him or funds he controls.


The PBGC plans to use its handling of the Sears sale of its tool line Craftsman last year as a blueprint for its negotiations on Kenmore, the sources said. Stanley Black & Decker Inc moved forward with its $900 million acquisition of Craftsman from Sears only after the PBGC gave its blessing, the sources said.

In exchange, the PBGC won a $250 million payment, rights to a 15-year revenue stream stemming from new sales of the tool line, and liens on $100 million of the retailer's real estate.

The PBGC's claims to Craftsman, Kenmore, and Diehard came after Sears spun out some of its real estate assets into a separate company, Seritage Growth Properties , in 2015 in a $2.7 billion deal.

The move in part led the agency to cut a deal with Sears giving it recourse to the retailer's other assets, one of the sources said.

Selling Kenmore is part of Sears' transformation to an integrated online retailer. But as Sears sells off its crown jewels, the PBGC's chances of being repaid in full dwindle, leaving the agency to pick up the balance in a potential future bankruptcy.

"When a company gets into financial trouble, creditors try to improve their position, lending more money, giving more time, in exchange for a security interest, a better chance to be repaid," said Lynn LoPucki, a University of California, Los Angeles Law School professor, explaining that the PBGC has taken this tactic.

"We call this the dance of death."

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