Would A Leveraged Buyout Help Sears Turnaround Its Business?

Practically since the day he took the reins at Sears, CEO and Chairman Eddie Lampert has been steadily stripping the once mighty retailing behemoth of assets and protecting his hedge fund’s investment as the company continues its steady march toward bankruptcy.

Any customer with the temerity to visit one of the remaining Sears or K-Mart stores will be greeted with the same depressing vision: Shelves that are mostly vacant of the most popular consumer brands, as many of Sears’ suppliers have become wary of working with the company. Displays are unkempt, and even the selection of appliances that were once Sears’ bread and butter has been dramatically reduced.

Back in October, Sears Canada announced its plans to liquidate, leaving behind only this video to remind investors and customers just how bad things got before the plug was pulled.

But despite all of this, Swiss asset manager Memento, a firm that primarily manages assets belonging to Switzerland’s Spadone family, believes the short-selling of Sears’ stock is the most pressing obstacle plaguing the floundering retailer.

And according to Bloomberg, Memento has a solution that would doubtlessly pique its current owners’ interest: To wit, Memento believes Sears could thrive under private ownership – that’s right: Their solution to Sears’ myriad structural and external problems is a simple 1980s-style leveraged buyout.

Despite the seemingly insurmountable obstacles facing a Sears comeback recommended the retailer consider going private, saying that “excessive” short selling has hammered the stock.

The firm, which serves as investment manager for Switzerland’s Spadone family, also called for an investigation into recent surges in short selling. Memento said in an open letter to Sears’s board that it owns nearly 2 million shares and believes in the long-term value of its stores, brands and employees.


“Sears has the potential for strong financial performance once it addresses a few critical concerns including, among others, the high volume of short-selling activity in its shares,” Memento Chief Executive Officer Alessandro Mauceri said in the letter.


Through Memento is a relatively small investor in Sears, the idea of going private brought a spark of optimism to the battered stock on Thursday. It climbed as much as 5.1 percent to $4.35.

Memento is seeking a “constructive dialogue” with Lampert & Co. to discuss the pressing issue of whether the company is presently doing enough to fend off the short sellers who have hammered its shares.

Memento is seeking a “constructive dialogue” with Sears’s board and management. The firm is working with law firm Olshan Frome Wolosky LLP on the effort.


Mauceri also urged Sears to form an independent board committee to safeguard the equity ownership interests of its investors. He also called for the Securities and Exchange Commission to investigate whether Sears’s short sellers - who place bets that shares will go down - violated regulations. In the meantime, he says the SEC should temporarily halt short selling in the stock.


Short interest as a percentage of total outstanding Sears shares has risen to almost 49 percent from about 44 percent two months ago, according to data from financial analytics firm S3 Partners. Short sellers borrow shares, sell them, buy them back at a lower price and profit from the difference -- unless the stock rises.


Memento wants Sears to provide “adequate assurances that it is taking the steps necessary to effectively address the urgent problem of naked short selling in its shares by establishing sophisticated internal controls and seeking appropriate regulatory action,” Mauceri said.

After a recent $900 million sale of its Craftsman brand, store closures and other cost cuts, Sears warned in March that there’s “substantial doubt” the company will survive.

And any veteran retail analysts seem to agree, citing same-store sales and profits that have been spiraling lower for years.

"There is no turnaround in progress now and there never will be a turnaround in the future," said Mark A. Cohen, director of Retail Studies at Columbia University’s Graduate School of Business and a fellow Forbes contributor.


"This perversion of a public company will remain propped up as long as Lampert can continue to strip it,” according to Forbes.

Given the company's otherwise-imminent demise, we imagine Lampert & Co. will be curious to hear Memento's offer.