Sears reaches deal with Chairman Eddie Lampert to save company and roughly 400 stores
Published Wed, Jan 16 2019 • 8:11 AM EST | Updated Wed, Jan 16 2019 • 1:23 PM EST
Lauren Hirsch

How Sears Was Gutted By Its Own CEO
David Dayen
October 17, 2018

Sears CEO and Board Chairman Eddie Lampert, pictured in 2004, could make billions from Sears's bankruptcy.

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.

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.

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.

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