Tue 08/14/2018 19:17 PM
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Relevant Document:
13D filing

In a schedule 13D filing today, ESL Investments disclosed that it submitted to the special committee of Sears Holdings Corporation’s board of directors a non-binding proposal to acquire Kenmore in a $400 million cash acquisition and to acquire the Sears home improvement business, or SHIP, in a $70 million cash acquisition. Both acquisitions are based on a cash-free, debt-free enterprise value. In a letter to the special committee, dated today and attached to the SEC filing, ESL re-emphasizes its belief that such transactions “should be undertaken together with tender and exchange offers designed to allow Sears to reduce its debt, extend its maturity profile and alleviate its liquidity challenges.” The ESL letter is signed by Edward Lampert, who serves as CEO of both Sears and ESL.

The letter states that ESL is seeking to enter into definitive agreements related to the transactions as early as Aug. 24 and that the firm is “prepared to move as quickly as possible” to complete due diligence for transactions involving Kenmore and SHIP. The fund and company CEO also says ESL believes it is possible to commence the go-shop process contemplated in the agreements within a timeframe that permits the fund to close on these acquisitions within 60 to 90 days. “An expedited process is in the best interest of all parties involved,” ESL says.

The letter indicates that ESL has submitted draft asset purchase agreements to the special board, but the drafts are not included as an exhibit to the filing. The letter discloses that the Kenmore APA terms are conditioned on ESL’s receipt of equity financing from a potential partner on terms acceptable to ESL. ESL is “confident,” however, that it will be able to secure such financing prior to closing, it writes.

Separately, the fund also states in the letter that it is planning to engage with potential third-party investors to solicit interest in a transaction that would involve all or portions of Sears’ encumbered real estate. Such transaction would include the assumption of the debt obligations secured by such real estate, the letter notes. The expectation is that such transaction would include an ongoing master lease for some or all of the stores to allow for their continued operation. “We believe such a transaction could accelerate, and provide Sears with greater certainty than, its existing real estate divestiture efforts,” ESL states.

In addition, ESL disclosed today that a sixth amendment to Sears’ mezzanine loan was entered into on July 25, pursuant to which, lenders JPP and JPP II made an additional advance to the mezzanine loan borrower in the aggregate amount of $75 million, “which amount was secured by the Mezzanine Loan Collateral.” As of July 25, after giving effect to such borrowings, the aggregate principal amount of the mezzanine loans outstanding was approximately $513.2 million. The filing discloses that commitments under the loan include $50 million held by Luxor Capital and $463.2 million held by ESL-affiliates JPP and JPP II combined.

Proposed Transactions

Since submitting its April 20 letter expressing interest in participating in divestitures of all or a part of Kenmore, SHIP and the Parts Direct business of Sears home services division, ESL, along with advisors Moelis & Company and Cleary Gottlieb, has worked with the special committee and its advisors to pursue the transactions, the fund says in today’s letter. The fund adds that this work included “conducting significant diligence on Kenmore, SHIP and Parts Direct; engaging with a variety of potential financial and strategic partners with respect to these businesses; and negotiating potential asset purchase agreements.” In a May 25 letter to the board - in which ESL requested the special committee’s permission to engage with potential partners regarding potential divestitures transactions - the fund disclosed that it had received “numerous inbound inquiries” from third parties.

The Kenmore acquisition proposed in today’s letter involves a cash acquisition of Kenmore based on a cash-free, debt-free enterprise value of $400 million, subject to adjustment in respect of the working capital assets and liabilities of the business at closing. With the special committee's consent, ESL states, “it has been discussing with potential partners their participation in the acquisition of Kenmore.” As noted above, the Kenmore asset purchase agreement lays out that the Kenmore transaction would be conditioned on ESL’s receipt of equity financing from a potential partner on terms acceptable to ESL.

Separately, ESL proposes to pursue a cash acquisition of SHIP based on a cash-free, debt-free enterprise value of $70 million, subject to adjustment in respect of the working capital assets and liabilities of the business at closing. According to the letter, ESL is “prepared to make an additional contingent payment of up to $10 million if the 2018 Adjusted EBITDA of the SHIP business achieves 85% of the SHIP management projections (inclusive of stand-alone adjustments).”

ESL continues to evaluate a potential transaction involving Parts Direct, but says in the letter that it has prioritized transactions involving Kenmore and SHIP “in light of the complexities of separating Parts Direct from Sears Home Services and the timeline required to complete such a transaction.” The fund’s April disclosure included a letter of interest from ESL to acquire Sears’ SHIP and parts direct assets at an enterprise value of $500 million. The letter indicated that the purchase price would be paid in cash, financed through a combination of ESL equity contributions and third-party debt financing.

ESL’s SEC filing provides a pro forma organizational chart as shown below.

(Click here to enlarge image.)
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