2

Related to this question. Yes, I know that the operations of a big company isn't directly related to personal finance, but understanding this seems an important part of investing, for instance SHLD is a stock a person might "invest" in, and knowing why it is priced the way and why companies do the things they do can help to avoid misconceptions that can affect one's personal finances when investing.

My question is this - why did Eddie Lampert through his ESL hedge fund need to pay $5.2 billion dollars for Sears? The price of SHLD is, at the time of writing this, up 36% giving Sears Holding a market cap of 73 million dollars. I was also reading that Lampert and ESL together own just under 50% of the shares in SHLD. Why couldn't Lampert just submit a tender offer for the remaining shares? Even if it did this at $1/share (at 50% premium over today's price) this would only cost him / ESL around $55 Million dollars and I would have to imagine that given the uncertainty surrounding Sears he would likely get enough shares for the tender to go through. Yet he is offering to pay $5.2 Billion, why? I realize some of this is in the form of debt forgiveness, but he has already paid a cash deposit of $121 Million dollars, which is over twice this amount. Wouldn't this imply, assuming that the deal is approved by the judge that the actual market cap of SHLD should be at least this amount, meaning that it should be worth over $2/share if the deal is approved?

1

Without reading anything about this specific case, usually numbers like this are some sort of total commitment amount. A financing arrangement that will provide $100mm each month for five years would be in the news as a $6B offer.

I suspect this $5B "offer" is really regular access to a smaller amount over a period of time provided certain performance levels are met, not $5B of cash right now.

Further, Sears is in bankruptcy so the market cap isn't terribly relevant. In bankruptcy the offer would need to be accepted not by the shareholders but ostensibly by the creditors.

  • 1
    The last paragraph is the important one, the people who have to accept the bid seem inclined to simply liquidate and take what they can get now instead of hoping for some turnaround plan. – pboss3010 Jan 16 at 17:46
  • 1
    @pboss3010 right, but suppose Lampert were to simply buy all the outstanding shares of Sears for $52M. How would anything be different in terms of Sears' financial state or his relationship towards and control of it? It seems to me like the only difference is how much he winds up paying, which in this case seems to be a lot more, even only including immediate cash. – Michael Jan 16 at 19:55
  • 2
    @Michael - I assume it's because of the Chapter 11 court's design. That court oversees all major financial decisions during a restructuring with the purpose of discharging debt but allowing the company to continue functioning. If he just bought all the shares, he'd own a company with a metric ton of debt and still be facing bankruptcy. In other words, this is the enforcement of the Chapter 11 court's administrator. – Brian R Jan 16 at 20:26
  • Chapter 11 really exists because typically companies will have made a lot of agreements to a lot of different parties. It takes time for everyone to understand what agreements would be breached if some asset was sold and it takes a bankruptcy proceeding to prevent a lender from foreclosing on property. Buyout offers are about appeasing creditors and generally involve negotiating new debt terms, and generally require long term capital commitments to talk creditors out of simply liquidating and moving on. – quid Jan 16 at 20:50

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.