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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43 replies on “Sears’ "Going Private"? Not So Fast”
Great post.
Welcome back!
Hello Todd,
Thanks for the post.
Just a couple of questions,in other words if he should go private shareholders will be part of that private company, right.
The other is I was told when shorting a stock the brokerage house borrows shares from someone else so how can there be no shares left to cover.
Thanks
Lampert is buying shares with his hedge fund and taking control from that so that eliminates any law suits.The hedge fund will own Sears and take it with majority ownership of Sears.
He is the COB and controls the board,so,not only is he the majority shareholder he is also on the board.
He can make a tender offer to the board and accept it.
LEGALLY
anon,
it would be your option…
shorts, they technically sell shares they do not have. they then have to go buy them to exit the trade.
if 20% of shares are short (sold) and 60% are not being traded then the # of share available for them to buy is low. the rush to buy without sellers causes the price to jump.
anon,
he is using sears’ cash to reduce float, not ESL, ESL has not bought shares in years. it is that action that is increasing ownership %
he cannot force you to tender him your shares in a “going private”
Yes Todd I am aware of that but to short there must be shares available.My brokerage house will not short unless the shares are available.
anon,
read the post, they are available because they are already short. if lampert keeps buying up the float, the shorts will be forced to cover as the shares available shrinks vs the outstanding short.
that causes a run up
Todd ae you saying that when shorting a stock you may not be able to cover that position.What happens then.
anon,
get an ID, too many “anons” are hard to follow…
no, i am not saying that. you will be able to cover but you may loose your shirt doing so…. the fewer tradable shares out there, the less liquidity…
that is very dangerous for a short
Anon,
It’s not that you won’t be able to cover your short. You will. But, in order to do so, the shares will drive up in price as the shorts scramble to cover.
For example, there is a limited number of shares you could buy as well. Does it mean that you can’t buy shares at some point? Well, not really, as long as the company is publicly traded. It just means that, if there is a limited number of shares to buy (or to borrow in the case of a short), when everyone starts buying, the price gets driven up because of supply and demand. If you wanted to buy a million shares when there were 100 million in float, it’d be much easier than if there were only 2 million floated.
Likewise, when all the shorts start covering, the share price rises, thus making more shorts want to cover, driving the price up more, and so on. The less shares out there available to buy for covering purposes, the faster and sharper the price of the stock goes up. Demand for shares outweighs the supply of sellers at some price, thus driving the price to a point where the balance resumes. As the price spirals up, shorts need to cover at any price.
Thank you Todd and Circle on the short theory.
Still a little nervous hoding Sears it is near its new low.
hope,
one good thing about the head shareholder running things, he know exactly how you feel
Does anyone have an idea on what Lampert may do or what his plan may be.
We know he is a long term investor but any detailed ideas.
I also read a post where a point was made where Lampert and Buffett are not the same because Buffett ran BRK where Lampert has ESL and SEARS.
Any ideas.
bull,
buffet used the “buffet partnership” to buy berkshire.
the same as lampert used esl to buy sears
he eventually cashed out the partnership and offered shareholders shares of berkshire or cash.
Again that cannot happen because Lampert cannot buyout Sears therefore he is running both companies seperatly.
Bull you are correct.
Todd nothing personal but you answer questions half way.
You say one thing and then say another.This is an example.
Lampert cannot cash out ESL and give shareholders shares of Sears because he does not own Sears as Buffet Partners owned BRK.
Todd please be more attentive and more details.
LOL THATS TRUE.
FIRST HE SAYS THERE IS NO WAY THAT COULD HAPPEN THAN HE SAYS IF IT DOES IT IS GOOD THAN HE SAYS BUFFETT DID THE SAME WITH BUFFET PARTNERS AND BRK.
HE IS RUNNING TWO COMPANIES AND THAT IS IT.
YOU LISTEN TO TODD YOU WILL GO NOWHERE.
Todd he is right on that.
back n’ forth….
i did not say that, it was another commenter
either some of you are being purposely obtuse, or just do not understand. i will try to make it real simple
the buffett partnership and esl are / were the same thing, a hedge fund. lampert and buffett are / were the managing partners.
for several years bufett ran both the partnerships and was chairman of berkshire. same as esl and lampert today
ultimately they decide what is done with the partnership..
buffett dissolved the private partnership and offered the partners either shares of berkshire (then its largest holding) or cash..
Lampert could do the same thing with ESL. He could dissolve esl and distribute either cash or sears stock to the partners, just like buffett did. it would have no effect on sears being public or private. in all actuality, it would end the speculation because it would them be more widely held
if you are confused still, read lowenstein’s book, you can find it to the right in the bookstore
would lampert do that? doubt it, it would dilute his control
I simply answered a comment..
In any case Sears is still tanking.
So it is not the same,Lampert personally does not own personally alot of shares of Sears it is ESL the hedge fund that does.
Circling again .
anon,
wrong again. he is the majority partner of ESL. meaning he would be the majority shareholder..
he also owns shares in trust through ESL.
ESL has various entities in which shares are held… he controls all of them…
nice try….
let’s not forget people buffett himself only owns roughly 30% of berkshire stock (before recent events in which he gave blocks of it away).
So much for those $80 calls bought by Berkowitz.
Follow the leader.
LOL
He owns the shares with his and other peoples’s money.
He personally, not in the hedge fund,does not own alot of shares.
Persoanlly is the word and key.
Out of the hedge fund he is not a majority owner.
The hedge fund is a fund.
Keep circling.
Just my opinion.
I just read about a huge hedge on another short position on Sears.Although the Sept $85 calls were bought there was also a large put position bought too.This and the underlying stock being shorted is very bearish.
I was looking to get into the stock but did not because of its price over a year ago.I am glad I did not because it has been going downhill since then.
I don’t believe in buying a stock just because it’s Eddie Lampert.Remember he did well in the market when I won’t say everyone did well but it was much easier than it is today.
I believe he made alot of mistakes it not selling real estate when the market was higher.I also believe he is so tied up with ESL he neglected Sears with its surplus of cash and in making investments.
As far as holding on to Sears for it’s real estate at least a reit pays a dividend while you wait.
Now nothing is working.
Look at ESL it is making investments in other companies and Lampert got paid over a billion in fees one year.
It looks like Sears will be good for his write downs on the gains in ESL.
I truly do believe Lampert does not know what to do with Sears.
Thanks MSF you are direct and to the point and make more sense than others on here.
Let me say this too that ugly bastard Cramer said to buy Sears all the way up to $180.
“LOSE MONEY” WITH JIM CRAMER
Beware the dreaded “reverse split”. For example, hypothetical company Shifty of Newark, with real estate
and other holdings worth far more than current market price, has 1 million shares outstanding. Big shareholder George Sorehead owns 800k and pushes rubber-stamp BOD to do a reverse split, exchanging 1000 old shares for 1 new one. Anyone
owning less than 1000 shares receives cash in lieu of fractional shares based on market price of Shifty shares on the record date. In effect, Sorehead and BOD steal from small shareholders by forcing them out at the market price. Not saying that this is what ESL has in mind but I have heard of it happening before, mostly with small companies, never with an entity as big as SHLD.
JP THAT WON’T WORK WITH SEARS BECAUSE THAT WOULD RAISE THE PRICE OF THE STOCK THIS TURKEY NEEDS A NORMAL 10 FOR 1 SPLIT TO MAKE IT ATTRACTABLE.
This is getting worse and worse still going down in after market hours.
Any comments anyone.
Todd, I think you are making a gross conceptual error here. First, by your logic, all MBOs (management buyouts), and more generally most LBOs (leveraged buyouts) would be impossible or provide shareholders with the protections your propose. Clearly that hasn’t historically been the case, so you premise that the language in the 13e would prevent a Lampert-led buyout is likely incorrect.
More specifically, the language you cite states 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.”
I don’t think the language in an SEC summary document should be intended as legal advice. First, what state would have jurisdiction over this? DE, IL, CT? Second, how have these statutes been enforced in the past? I’d again point to the number of MBOs over the past decade as evidence that the SEC rule you cite means nothing.
Thank you annon now Todd is either going to make a worthless comment or not say anything at all.
Look at his previous blogs when asked certain questions he does not respond.
Todd you are now arguing with people who are being intentionally thick, so don’t bother. If you take a look at what Eddie has done with Sears, as well as other investments along with what he says. There’s no indication that he’s got anything but plans to cut debt, reduce shares, and build Sears into a better company.
On a separate note, I was recently at a tech conference where I met a fairly senior tech person from Sears who was on a panel. His perspective was very interesting. Keep in mind he’s someone from the online biz, not a finance guy, but here’s what he shared for what it’s worth:
1. He’s still not a buyer of shares through the ESOP
2. The feeling has shifted from that of a sinking ship to Eddie may pull this off.
3. They all think Eddie has a plan he hasn’t shared.
4. The turnaround is going to be v tough in current environment.
5. Reorg is positive but doesn’t go far enough.
6. LandsEnd shops have been a huge success.
7. Eddie is a wannabe geek, and sees the websites as a crucial driver for the company.
8. Homeservices is a huge untapped asset which he thinks they’ll syndicate before putting brands in non Sears/Kmart stores
9. He thinks Sears may have found that right store format in some of its southern stores
10. Sears has battened down the hatches and will continue to cut traditional ad spend, ie circulars
Long & Strong
Dr J
anon,
DE and IL have both adopted the protection…
just because “it has happened in some instances before” means nothing in this case..it is a bit like saying because your neighbor had an affair you will also. no two circumstances are the same
LLI..
point? I know enough to know when certain folks just want to argue..
i do not “pee into the wind”
DR J.
Nice job
DR.J
SIMPLY BULL MANURE.
AND IN YOUR BULL YOU STILL DON’T HAVE HIM BUYING STOCK.
LOL
Todd,
Precedent does matter in these cases. It is called case law. In any cases, MBOs are possible, common, and subject to fairness scrutiny like any deal. All Lampert needs is a fairness opinion and he can do what he wants.
anon,
let’s do it this way…
find us a “precedent” this decade where a company with $50 billion in sales was the subject of an MBO at a 52 week low…
Toddo, I’m going to get an ID soon, but in the meantime, here you go…
1. First up, I’m not saying I think SHLD will go private. What I’m arguing is that your reasoning (legal protection from the 13-e rule) is completely and utterly flawed. You’ll likely find more protection for/against an MBO/LBO in the credit agreements and indentures (ever read one??)
2. Last time I checked, sales don’t pay the operating expenses, interest, or the debt principal, so your chosen metric is irrelevant. Try this:
http://online.wsj.com/public/resources/documents/info-buyouts0704.html
Mostly LBOs, but should easily refute your (flawed) implication that SHLD is too big for a buyout since an LBO is simply a more general form of the MBO. Management likely participated in many of these deals.
As you will see, SHLD wouldn’t come anywhere near making the list based on EV (you know, what it actually costs to buy the company….sales has nothing to do with it)
Sometimes it is best to admit your premise is wrong (even if the outcome is right).
I’ll be back with my ID soon.
anon,
i was not valuing the company on sales, just giving size for comp. sake for an example of you to find..
actually you are wrong, sales do pay all those things, what is left is profit
I also did not say sears was too big for a lbo. i said that the scores of examples you stated were out there were of the much smaller variety (ie TOPPS). The point was that mbo’s of co.’s the size of shld are extremely rare.
the only one i can think of is RJR and that was three decades ago and management failed after they and kkr drove up the price to all time highs
i think shareholders would except a similar scenario here?
then 13-f scenario i gave would be the very basis for most of the lawsuits that would come of an offer from lampert to take it private at these levels..
let’s reverse it. say lampert tries to. what does ackman and berkowitz do to try to stop it and lose $$?
“Do not just give a gift, grant a wish”. Know this slogan? Yeh! It is Sears!!!!!! Clothes, footwear, tools, electronics, jewelry, beauty products, appliances, furniture, and bedding – everything is there! But the company has lots of drawbacks as well. All the dissatisfaction with the services and products are on http://www.pissedconsumer.com. There you can post your complaints to share with others.
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