SHLD Stock: Be Wary of the Lands End Spinoff

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Eddie Lampert can call it whatever he wants, but it won’t change what the impending spinoff of Lands End from parent company Sears Holding (SHLD) really is: a desperate effort to buy Sears a little more time before its inevitable demise, ultimately paid for by SHLD stock owners who are eagerly (and errantly) waiting to receive their stake in the Lands End corporation.

Lands End SpinoffHarsh? Perhaps, but the details of the deal and Lampert’s history of spinoffs make it tough to come to any other conclusion. Current SHLD shareholders expecting the maneuver to unlock hidden value may want to read the fine print and review some older headlines.

Lands’ End Spinoff Details

With just a quick glance, the split of Lands End from SHLD looks like a run-of-the-mill deal. For every share of SHLD stock an investor owns as of March 24, they’ll get 0.30 shares of LE — Lands End’s assigned symbol. That implies about 32 million shares of LE will be issued come April 7.

What SHLD investors will be getting with Lands End is a company that generated $1.56 billion in revenue last year, and a company that turned $80 million of that revenue into profit. Not bad. Not great, but not bad.

Even though Lands End’s revenue had been slipping since 2011’s peak of $1.73 billion, given the chaos that parent company Sears had created for all of its brands and entities, it’s a forgivable sin. Indeed, Lands End may well thrive again when no longer under the SHLD umbrella.

There’s more to the story, however.

Before casting off Lands End, Sears will be collecting a $500 million dividend from Lands End, tapping into a $515 million credit facility and possibly even accessing a $175 million credit line to make the payment, at which time Sears will pass along shares of the new company — saddled with roughly half a billion dollars in debt — to existing SHLD stock holders.

If it doesn’t quite seem fair, that’s because it’s not fair. Then again, playing fair was never the point with previous, similar financial maneuvers from Lampert. Why should this one be any different?

A Shady Spinoff History for Sears Holding

Just for the record, this isn’t the first time Sears has loaded up a subsidiary with debt and then dumped it. Back in early 2012, the retailer spun off its 89 Orchard Supply hardware stores, but not before taking $340 million in debt off of Sears’ books. Less than two years later, Orchard Supply had filed for bankruptcy, unable to service the debt it was been loaded down with.

Sears’ then-CFO Robert Schriesheim said at the time that the debt was Orchard Supply’s to begin with. But Sears had owned and directed Orchard Supply since 1996. If it was sitting on that much debt, Sears had to have a hand in creating it and/or getting Orchard Supply into the weak shape it was in by 2013.

And that wasn’t even the most insulting spinoff Eddie Lampert has engineered. The most amazing one was 2012’s spinoff of the Sears Hometown and Outlet Stores (SHOS) division. That spinoff began not with the issuance of stock, but with the issuance of rights to buy the spunoff shares. Sears made money by selling those rights to shareholders, and then selling SHOS stock shares to owners that chose to exercise those rights. All told, that “spinoff” netted Sears $446 million.

That seems more like an IPO than a spinoff, doesn’t it? In a true spinoff, a company doesn’t make current shareholders buy what they technically already own.

Given how those prior, so-called “spinoffs” unfurled in a way that put SHLD — and Eddie Lampert — at a distinct and somewhat unfair advantage relative to the folks on the other side of the table, the brewing Lands’ End spinoff may not be as great a deal as it’s being billed.

The Last Word

In his defense, as a major shareholder of SHLD stock, Lampert also owns a big chunk of the struggling companies being spun off; so he’s at least eating some of his own cooking.

On a net basis though, the deals still leave individual shareholders holding most of the bag, as Lampert methodically reduced his stake in both Orchard Supply and Sears Hometown and Outlet Stores following their respective spinoffs … despite singing the praises of both companies as stand-alone outfits before the splits went into effect.

In other words, the Lands End spinoff may not be the brilliant strategic move it’s being made out to be. More than anything, it just looks like a quick, $500 million lifeline for SHLD.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/03/shld-lands-end-spinoff-sears/.

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