Sears’ "Going Private"? Not So Fast

• Posted by ToddSullivan
• on June 18th, 2008

This has been going around for a long time now so let’s take a look because as the price falls and Sears’ (SHLD) Chairman Eddie Lampert continues buying shares, some folks are claiming his goal is to take the company private and shareholders, except him, will get “screwed” for lack of a better term.

While Lampert may continue to buy shares and increase his ownership percentage, Sears’ is not “going private” for a number of reasons.

From the SEC Website:
“If the transaction is initiated by an affiliate (an insider) of the company, or the company could be deemed to be making an acquisition of its own shares Rule 13e-3 of the Securities Exchange Act of 1934 requires the affiliate and/or the company to file a Schedule 13E-3 with the SEC. When Rule 13e-3 applies, the company is said to be “going private” under SEC rules. While SEC rules don’t prevent companies from going private, they do require companies to provide information to shareholders about the transaction that caused the company to go private. The company also may have to file a merger proxy statement or a tender offer document with the SEC.

The filing of a Schedule 13E-3 is also required when issuer-initiated or affiliated transactions result in a company’s publicly held securities no longer being traded on a national securities exchange or an inter-dealer quotation system, such as Nasdaq.

The Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that the company considered, and whether the transaction is fair to all shareholders. The Schedule also discloses whether and why any of its directors disagreed with the transaction or abstained from voting on the transaction and whether a majority of directors who are not company employees approved the transaction.

Going private transactions require shareholders to make difficult decisions. To protect shareholders, some states have adopted corporate takeover statutes that provide shareholders with dissenter’s rights. These statutes provide shareholders the opportunity to sell their shares on the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the transaction is concluded, remaining shareholders may find it very difficult to sell their retained shares because of a limited trading market.”

So the “Lampert can force a share sale” is erroneous. While he could take the shares off the market by “going private”, he cannot force you to sell your shares to him if Sears’ decided to go private. You could still opt to retain your ownership percentage. It is different from a merger in which you “exchange shares” from one company for another.

“Fairness of offer”. This was a large bone of contention in the failed Sears takeover of Sears Canada. Sears USA owned 53% of the outstanding shares of Sears CA at the time of the offer. The buyout was fought in court by minority shareholders who eventually prevailed. The fact that Lampert has been buying share at prices far above where they sit now, would eliminate any argument he would make that a “going private” price he is offering does NOT violate this element.

Also, current minority shareholder Bill Ackman, who lead the fight against Lampert in his Sears CA bid is now a Sears Holdings shareholder. Ackman bought in at prices well above current valuations and anyone who knows anything about him know he would fight any “going private” bid below the $100 plus a share he paid.

Let’s also not forget the conflict of interest here. Using shareholder money to eventually take the company from them for yourself despite public comments to the contrary would spark a wave of lawsuits Lampert has no interest in spending the next 10 years fighting.

That being said, roughly 60% of Sears’ shares are held by Lampert, Management and Funds that are value oriented. What is more likely is that Lampert will continue to repurchase shares and shrink the float. Now, consider this, when you subtract short shares (26 million) and shares held by long-termers, it leaves only 27 million shares actively trading or 20% of the total.

At today’s prices that means $2.1 billion can buy the remaining trading float and then you create a short squeeze like you have never seen as shorts rush to buy shares that virtually do not exist to cover their positions.

Anyone want to bet this is Lampert real game? Keep buying up what trades and then watch the shorts cut each other throats to cover. It would be justice for him and real profitable for shareholders as the buying without selling would cause share prices to rocket up.

What does Lampert gain buy going private? If the goal is to attain wealth, then isn’t having Sears publicly traded the way to go? Won’t his wealth climb faster that way than if Sears is privately held? Maybe he takes it private, “fixes” it and then spins it back out for a a nice profit? Well, if that is true, then why not just keep your shares and ride the wave? Either way, if his goal is the same as yours, where is the problem?

Disclosure (“none” means no position): Long SHLD

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