(AP Photo/Gregory Bull, File)
By now, Prospect readers probably know the basic story of the demise of Sears. The company that pioneered the 20th-century version of e-commerce—the catalog—did not succumb to 21st-century innovations like Amazon and Walmart. Rather, it was dismantled piece by piece by Eddie Lampert, the hedge fund titan (and former Yale roommate of Treasury Secretary Steven Mnuchin) who purchased it in 2005. Lampert and his hedge fund engaged in relentless financial engineering to suck out all the value from Sears and leave a desiccated husk, which now could face possible liquidation in bankruptcy.
But just how much did Lampert vacuum out? That's a surprisingly hard question to answer, if only because of the variety of schemes he employed. Lampert was at one point simultaneously Sears's CEO, board chairman, transaction partner, landlord, and banker. (Upon the bankruptcy filing, he stepped down as CEO.) Because of his outsized role as Sears’s number-one creditor, he stands to gain in a bankruptcy even if his shares of Sears stock get wiped out. Through this ploy, Lampert has been able to transfer to himself all the salvageable assets of the company. And so far, it’s worked out.
If you look just to Lampert's compensation as chairman and CEO, you might conclude that he put all his efforts into making Sears a success. Lampert typically took no salary in his roles at Sears, and despite numerous buybacks and other schemes to raise the stock price, he did not engage in any quick-buck stock sales, opting instead to accumulate shares. Currently, Lampert personally holds a 31 percent stake in Sears, and his hedge fund, ESL Investments, holds another 18 percent. That stock has drastically plummeted to near-zero levels, and Lampert has taken a bath.
But it's important not to overlook Lampert's other Sears-related revenue streams. First, Lampert has been lending Sears enormous amounts of money.
It's standard practice in a private equity–style play to load up the portfolio company with debt as a means by which the private equity lender can extract the corporate cash flow. It's decidedly atypical for the CEO himself to be the lender, however.
As of now, Lampert's ESL and a related fund called JPP own roughly $2.66 billion in Sears debt. The cash flow just on the interest on these notes is between $200 million and $225 million per year.
This figure continues to grow—ESL announced on Monday another $300 million debtor-in-possession loan to support operations through the end of the year.
Presumably, this debt would be significantly curtailed in bankruptcy. However, a fair bit of the debt is secured by Sears's real-estate assets. For example, real-estate collateral on 46 Sears properties backs a $500 million loan ESL made in January 2017; the bankruptcy could lead to Lampert's fund simply obtaining those property rights. In all, Lampert’s interests own around $1.5 billion in secured debt backed by real estate.
ESL previously proposed an out-of-court restructuring proposal in which Sears would repurchase all the secured debt at full value, which would essentially have been a direct transfer of tangible assets from Sears to Lampert. Other creditors rejected the plan. But since secured lenders are paid out first in bankruptcy, something like ESL’s proposal is likely to go through; Sears listed $7 billion in assets with its bankruptcy filing.
A bankruptcy judge must make these determinations, and this will probably bring heavy scrutiny on various conflicts of interest in Lampert's dealings. But some of Sears's assets have already been ferried into Lampert's hands.
In 2015, Lampert split off 235 of Sears's most profitable stores and 31 other Sears real-estate holdings, selling it to a publicly traded real-estate investment trust (REIT) called Seritage Growth Properties for $2.7 billion. The sale/leaseback deal, common in private equity, has Sears paying Seritage rent on the use of the Sears facilities it once owned. Lampert's hedge fund owns 43.5 percent of the Seritage limited partnership; he serves as its chairman.
Since 2015, Sears has paid $349 million to Seritage in rent, as well as installment expenses like insurance, property taxes, and utilities, according to its 2017 annual report, along with another $45 million in termination payments from shuttered stores (and as CEO, Lampert made the decisions on what stores to shutter). Moreover, when Sears does terminate leases with Seritage, the REIT is free to negotiate alternative development on the properties. As of September, Seritage has announced 94 redevelopment projects totaling $1.4 billion in investment, with “targeted incremental returns of approximately 11 percent,” according to a Seritage press release.
It wasn't only real estate that Lampert signed over to himself. In 2014, Sears sold Land's End, a clothing brand, to a consortium that was two-thirds controlled by ESL. Today, the brand has a rough market value of $314 million. In 2016, Sears sold Craftsman brand tools to Black & Decker for $900 million. The profits were used to pay off debt, including to Lampert. In 2017, Die Hard batteries were put up for sale. And this year, Lampert has made a $400 million bid for Kenmore appliances, the crown jewel of what remains at Sears, along with an $80 million bid for Sears Home Improvement stores.
So the leadership of the Sears empire—Lampert—is gradually selling off bits and pieces of it, mostly to Lampert. The cash generated from those deals in large part serviced Sears's debt, the payments on which also went to Lampert. And now, having put Sears into bankruptcy, the top creditor—Lampert—stands to gain from the final fire sale.
Sears stockholders have already won a $40 million settlement over this style of self-dealing, claiming that the Seritage deal spun off the company’s assets at a bargain-basement price. But $40 million is a pittance of the total cash that Lampert has extracted.
It's hard to put a full number on it, but between the $200 million annual debt service, the $394 million in rent to Seritage, and the $314 million Land's End stake, you could say conservatively that anywhere between $900 million and $1.5 billion have been ferreted out.
And in bankruptcy, another $1.5 billion to $2 billion could be on the way. None of this, by the way, includes Lampert's personal management fees from ESL Investments.
Yes, Lampert lost a lot of money on his Sears bet. His net worth has fallen, and confidence in his investment skills has waned. But much of that is due to his mismanagement of the company, in particular pitting parts of the business against one another (he installed three dozen different management teams and boards inside each department, specifically to foster competition between them, to disastrous consequences) and drastically reducing investment in the stores. In what we’re told is the iron logic of capitalism (and its moral justification), someone who destroys that much wealth and investment would personally suffer for those decisions.
But as of today, Eddie Lampert still has a personal net worth of $1.1 billion, and ESL has a portfolio value of $1.3 billion as of the end of 2017, most of it tied directly to Lampert himself. That doesn’t include what he will reap through the bankruptcy, or the ongoing revenues from the assets he has managed to capture. Meanwhile, the 175,000 workers who lost their jobs at Sears and Kmart over the last decade, and the 68,000 employees whose jobs are at risk today, have next to nothing to show for it.
Essentially, through financial engineering, Lampert has been engaging for years in a slow-motion liquidation of Sears, with a sole beneficiary in mind. This type of asset-stripping, especially when the CEO and chairman is the recipient of the assets, should not just be scrutinized. It should be banned.
