Restoration Fires Back at Sears

The housewares chain wants Ed Lampert's retail empire to sign a standstill agreement.
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Restoration Hardware

(RSTO)

welcomed

Sears Holdings

(SHLD)

to join its buyout process on Tuesday, but the high-end housewares chain said Ed Lampert's retail empire has to agree to a so-called standstill agreement.

"While Sears has announced its willingness to sign a confidentiality agreement, there is no agreement on terms and, to date, instead of agreeing to the standstill agreement to which other interested parties have agreed, Sears has proposed to reserve the right to launch a tender offer outside the process," said an independent committee of Restoration's board of directors in a statement on Tuesday.

A standstill agreement typically limits a company from buying shares in a target as a way of preventing a hostile takeover. Sears Holdings, the owner of the Sears and Kmart chains, already purchased a 13.7% stake in Restoration Hardware earlier this month.

Sears Holdings has suggested it was being shut out of the bidding on Restoration Hardware after a private firm called Catterton Partners teamed up with the company's chairman and CEO, Gary Friedman, to take it private for $6.70 a share, or about $267 million.

In a letter to Restoration's board that was made public in a regulatory filing Monday, Sears said it was willing to top Catterton's offer by a nickel a share, based on public information that was available. However, the retailer said it was confused by Restoration's demand that it make an offer before receiving access to insider information to evaluate the company.

Sears also indicated in the letter that it believed the private-equity firm, in its deal with management, was being favored in the buyout process.

Restoration said Tuesday it's encouraged by Sears' current proposal of $6.75 a share, noting that it's "a vast improvement" over its original proposal to pay $4 a share for the chain. At the same time, its independent committee said it believes that stockholder value will be maximized if Sears agrees to a standstill pact.

"Sears is an American icon," said Ray Hemmig, chairman of the committee, in a press release. "We are flattered that it is interested in learning more about our company. We welcome its participation in the process along with the other interested parties. However, the committee is firmly committed to a fair process that will yield the best results for all stockholders and believes that process is best served through all parties agreeing to the proposed standstill terms without preferential treatment of one party over another."

A spokesman for Sears declined to comment. Shares of Sears recently were up $4.01, or 3.7%, to $111.78.

With only $713 million in annual revenue, Restoration is fairly inconsequential for Sears Holdings, a $16 billion company that hedge fund manager Lampert cobbled together by merging Kmart with Sears Roebuck to form the nation's third-largest discount-chain owner. That said, Lampert appears to see value in Restoration's brand if it can be brought into his holding company.

With shares of Restoration Hardware recently trading at $7.04, above both suitors' offering price, investors are betting on the potential for a bidding war. Lampert's tentative offer looks like an attempt to force Restoration's board to consider his proposal out of fiduciary duty, though it also signals to shareholders that he could be willing to go higher once he has more information.

Catterton Partners is a consumer-focused private-equity firm based in Lampert's hometown of Greenwich, Conn. Its $6.70-a-share deal came at a 150% premium to where Restoration's stock was trading the day the deal was announced, so it's hardly a low-ball offer.

The Catterton agreement allows for a 35-day "go shop" period for Restoration to entertain competing proposals from third parties. That period ends Dec. 13.

Observers say Friedman, a merchandising genius credited with building

Williams-Sonoma

(WSM) - Get Report

into an arbiter of good taste, is probably opposed to working with an activist investor like Lampert.

"Gary Friedman wants to take this baby private on his own terms so he can build it and have a nice chunk of equity," says Howard Davidowitz, chairman of retail research and investment banking firm Davidowitz & Associates. "He knows that Lampert probably sees value in the brand and wants to combine it with Sears. As a high-end merchandiser, he doesn't want any part of that."