What Sears Could Do to Fix Things: Borrow, Sell, Spin OffLauren Coleman-Lochner
As it reported mounting losses, dwindling sales and further evidence it’s been burning through cash last week, Sears Holdings Corp. said it was looking for added flexibility in lining up financing.
Here’s a rundown of four ways the troubled retailer could raise enough money to keep the lights on:
BORROW MORE -- There’s value in its real-estate portfolio, and Sears could take a page out of J.C. Penney Co.’s book. When that retailer was strapped for cash last year, and its stock was being pounded, it put some of its properties up to secure a $1.75 billion loan from Goldman Sachs Group Inc. The liquidity helped J.C. Penney fund a turnaround after sales slid 25 percent under former Chief Executive Officer Ron Johnson, who left in April 2013.
The question is, how much are the more than 2,000 Sears and Kmart stores the company owns and leases worth? Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles, estimated last year that they could fetch $6 billion -- in a liquidation scenario using what she called “aggressive” assumptions.
“I’m sure they’re going to get a number of investment banks pursuing them trying to do real-estate deals,” along with lenders interested in making loans backed by real estate or inventory, said Patrick Dalton, chief executive officer of GB Credit Partners, which makes and structures debt investments.
Chris Brathwaite, a spokesman for Sears, declined to comment on any of the possible actions.
HAVE A SALE -- Instead of borrowing against its real estate, Sears could put the portfolio, or some of it, on the market. “For the past several years, there’s been a significant gap between what Sears values it at and what the real estate guys who would buy this value it at,” said Matt McGinley, managing director at International Strategy & Investment Group in New York. “Perhaps it’s coming to a point now where Sears is going to be a little bit more realistic about what the valuations are.”
While such transactions have brought in significant cash -- including C$400 million ($366 million) from the sale of five Canadian leases last year -- they can strip the company of some of its best assets. Buyers would only be interested in sites with the most potential for shopping traffic, and if those went, McGinley said, “the free cash flow could decline a lot more.”
SPIN IT OFF -- Sears could spin its properties into a separately traded real estate investment trust in a so-called sale-leaseback transaction, where the company would receive cash from the offering and then pay rent on the stores. REITs must derive at least three quarters of their income from rents or interest on mortgages financing real estate. A REIT structure could be a problem for Sears, whose stores “don’t generate positive operating cash flow,” making paying rent difficult, McGinley said.
In any event, there may be little appetite for a single-tenant REIT. In 2008, Target Corp. shareholders rejected hedge-fund manager Bill Ackman’s proposal to create such a spinoff that he said would raise $5.1 billion.
TAP WHAT IT HAS -- At the end of the second quarter, Sears had access to $240 million on its revolving credit loan and $829 million in cash on its books, and also the authorization to issue up to $500 million in commercial paper. On a short-term basis, it could put it all to use -- to a point. “Not all of that cash is cash you can actually take and spend,” Gilbert said. “Every day you’re paying bills.” And companies always need to keep a certain cushion untapped on their revolvers. Gilbert said she figures Sears has perhaps $600 million in short-term liquidity from cash and the revolver, a sum that’s “not great” for a retailer of its size.
So job one, McGinley said, is for Sears to renegotiate its $3.28 billion revolver, which expires in 2016. Such loans, which allow companies to borrow and then pay down the balance, are crucial for retailers, helping them fund operations as payments ebb and flow. “Without that revolver, it would be very difficult to keep the business going,” McGinley said. And financing an adequate replacement could be tougher than before, he said, because “the financial condition is a lot worse than it was two or three years ago.”
While operations have deteriorated, and “even a Main Street consumer is hearing about how bad things are,” Dalton said he would not to count the company out. “It’s a very, very smart management team,” he said. “They’ve survived a lot longer than most people would have thought.”