A shareholder class action lawsuit has been filed against Sears Holdings alleging the company’s plan to sell its prime real estate holdings to a trust controlled by CEO Eddie Lampert would strip the struggling retailer of one of its last remaining valuable assets, leaving it a debt-laden, money-losing renter in its own stores.
The proposed $2.5 billion sale, the suit says, will benefit Lampert, who lives in Miami, at the expense of shareholders and hasten the demise of Sears, once a quintessential American retailer.
“The proposed transaction is a financially and structurally unfair deal,” the lawsuit says. “Sears and its stockholders would receive a severely inadequate cash payment that the defendant Lampert-controlled company may use to cover operating losses and debt obligations for another year or so, before stockholders are left holding the bag in an insolvency widely viewed as inevitable if the proposed transaction occurs.”
The proposed transaction would sell 254 Sears stores to Seritage Growth Properties, a real estate investment trust created by Sears Holdings. Lampert, a hedge fund billionaire who owns 49 percent of Sears Holdings, would control both the retailer and the newly formed REIT. The transaction is expected to close this month, with Seritage leasing the stores back to Sears at a cost of $150 million to the retailer in the first year.
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The lawsuit, filed late Friday in Delaware Chancery Court, names Lampert, Sears Holdings, Sears board members and Seritage as defendants. It seeks to stop the proposed transaction, saying the $2.5 billion purchase price is a “paltry” amount that in the face of ongoing operating losses makes imminent insolvency a likely outcome for Sears, based in the Chicago suburb of Hoffman Estates.
“The complaint contains numerous factual misstatements and is legally without merit,” Chris Brathwaite, a Sears spokesman, said in a statement. “The company plans to contest it vigorously and believes the proposed real estate investment trust transaction will provide substantial benefits to Sears Holdings and its shareholders.”
The suit was brought on behalf of Sears shareholder John Solak by Robbins Arroyo, a San Diego-based law firm.
Craig Johnson, president of Customer Growth Partners, a retail research and consulting firm, was not surprised that the proposed sale-leaseback transaction would concern existing Sears shareholders, given Lampert’s controlling interest in both the buyer and seller. “Shareholders don’t want to be played for chumps,” Johnson said. “They’re rightfully guarding their interests.”
The retailer has seen its sales decline since Lampert combined Sears and Kmart in an $11 billion deal in 2005. The company reported losses of $1.7 billion last year, with revenue declining nearly 14 percent to $31.2 billion.
Sears Holdings closed 234 stores last year. At the end of its fiscal year Jan. 31, Sears Holdings operated 1,725 stores, including Sears, Kmart and Sears Auto Centers, 684 of them in properties it owns. That’s down from 3,949 stores at the end of its 2010 fiscal year.
In recent years, the company has spun off assets including Orchard Supply Hardware and Sears Hometown and Outlet stores, as well as Wisconsin-based Lands End, one of the few bright spots in the Sears Holdings portfolio.
The proposed sale, announced April 1, would transfer some of the best-performing Sears and Kmart stores to the real estate trust, the lawsuit says. As part of the transaction, the REIT has the right to capture half of the store space in the properties to rent to other tenants, shrinking the footprint of Sears and Kmart stores. Consumer electronics may disappear from some stores as they get smaller.