Street Cold on Sears' Canadian Exposure

Investors waiting for big asset sales to revive shares of Sears (SHLD) awoke Monday to news of an acquisition.

The retailer unveiled a plan to buy the publicly traded shares of its 54%-owned Sears Canada(SEARF) unit for $715 million.

"A lot of people expected them to be sellers, not buyers," said Morningstar analyst Kim Picciola. "This is certainly not what I was expecting."

Shares of Sears Canada more than doubled 100% this year after it announced the sale of its credit card portfolio to J.P. Morgan(JPM) for C$2.3 billion. The company is in the process of returning proceeds to shareholders via a special dividend of C$18.64 a share.

Investors had also bid up the shares on speculation that once the credit card transaction was completed, Sears Canada would be converted to an income trust, seek to merge with another retailer or be spun off completely from its parent company. The Toronto-based chain slashed payrolls earlier this year and adopted other aggressive cost-cutting measures that smacked of the influence of Ed Lampert, the hedge fund guru with ESL Investments who became chairman of Sears Holdings after orchestrating the merger of Kmart and Sears last year.

But rather than sell Sears Canada, Lampert has chosen to buy. The acquisition price comes out to C$16.86 a share. Sears Canada's stock closed at C$34.10 Friday, but after the C$18.64 dividend its shares had an implied value of C$15.46 apiece before the parent's offer surfaced.

"The offer represents a 8.7% premium over Friday's closing price and a 22.2% premium over the average closing price since Aug. 31, 2005," the date the credit card deal was announced, Sears Holdings said.

"They must see some value in the business that they think they can extract by controlling it," Picciola said. "Rather than sharing it with someone else, they want to take full advantage of the fruits of their labor. They still could sell off some of the assets at some point in time."