NEW YORK (TheStreet) - Sears Holdings (SHLD - Get Report) is considering strategic alternatives for its 51% stake in Sears Canada. The Eddie Lampert-run company is also considering hiring investment bankers to lead that strategic review. But was anyone really asking?
Sears Canada sold some of its prized real estate assets in 2013; raising $509 million to pay a special dividend to its shareholders in December. The biggest beneficiary of those asset sales was Sears Holdings, which retained a controlling interest in Sears Canada since a partial spin-off of the unit in late 2012.
Sears received about a quarter of a billion dollars in the Sears Canada special dividend. Sears Canada also recently forked over a 50% interest in a development in British Columbia to Concord Pacific Group for a $140 million payment, and created a 50/50 JV with Montez Income Properties that generated $315 million in proceeds.
That Sears now is publicly announcing the company wants to sell its Sears Canada stake is no surprise. Cash needs at Sears are just as pressing as they were at the end of the year, and Sears Canada may be one of the few assets in the company's empire that could find interested buyers.
It's also no surprise Sears Holdings announced its intent to sell its Sears Canada stake. Sears earnings are due on May 22 -- it's hard to imagine remaining investors in the company have much to hope for other than asset sales and repairs to the company's balance sheet.
Sears Holdings shares actually fell nearly 6% in Wednesday trading on its announcement, whereas Sears Canada rose nearly 5% to $15.14.
If buyers aren't banging on Sears Holdings doors for a piece of Sears Canada, Wednesday's announcement could drum up interest among strategic and private equity buyers, according to Sachin Shah, a merger arbitrage strategist at Albert Fried & Co.
Hudson Bay Company, the owner of Lord & Taylor and Saks Fifth Avenue might seem a likely buyer, however, it has made a canny investment on the turnaround of high-end retailers. Sears Canada is decidedly middle-to-low market. Target (TGT), meanwhile, has struggled to grow in Canada.
A financial buyer, however, may look at Sears Canada as an asset that can be managed with some leverage given its relatively solid balance sheet and remaining real estate assets.
Sears Canada generated about $4 billion in revenue in 2013 and $35.7 million in adjusted earnings before interest, taxes, depreciation and amortization as same-store sales fell 2.7% in the year, versus a 5.6% decline in 2012.
The company also ended the year with $374 million available on an $800 million senior secured credit facility that is guaranteed by the company's inventory and credit card receivables. Cash and cash equivalents were $605 million as of Feb. 1, 2014.
Sears Canada has 14 owned department stores, 96 leased stores, two owned Sears Home outlets, in addition to distribution centers and transport businesses.
Sale and lease-back transactions could be a way to wrench out a return from a full acquisition by a financial buyer. A string of 2013 asset sales also shows the company has the capacity to conduct sales. In 2014, Sears Canada expects further real estate sales and expense management across its stores.
Ultimately, Eddie Lampert, head of Sears' hedge fund owner ESL Investments, will decide upon a Sears Canada deal, either through a full or partial sale of the company. After half a billion dollars' worth of real estate was sold and paid to investors, now may be a good time to let a strategic or financial buyer figure out a turnaround investment.
"The operational value of Sears Canada has been supplemental to its real estate value. The operational value is getting tougher and tougher," David Tawil, President of event driven hedge fund Maglan Capital said in a telephone interview.
Some Sears Canada investors appear to have come to that realization. Fairholme Funds, a large Sears Holdings shareholder, sold its 7% stake in Sears Canada in February.
Fairholme, Sears and Hudson Bay declined to comment.
"This morning's announcement is an ownership matter, not an operational matter, and our focus is on meeting the needs of Canadians for themselves and their homes," Sears Canada spokesperson Vincent C. Power said in an e-mail.
-- Written by Antoine Gara in New York.