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Restoration Opens Up to Sears

The two sides sign a confidentiality pact, setting up a buyout bid for the home-furnishings chain.
Author:

Restoration Hardware

(RSTO)

opened its doors to

Sears Holdings

TST Recommends

(SHLD)

after the retailers reconciled the terms of their courtship.

In a regulatory filing with the

Securities & Exchange Commission

, the two companies revealed that they have reached a confidentiality agreement that will give Sears access to Restoration Hardware's financials and a chance to make a winning bid for the company.

Restoration Hardware, the San Francisco-based home furnishings chain, has agreed to be acquired by private-equity firm Catterton Partners for $6.70 a share, or about $267 million. Catterton teamed up with the company's chairman and CEO, Gary Friedman, for the deal.

Sears has said it will beat the Catterton offer, but the retail conglomerate has complained that it was being

shut out of the bidding process, hinting that Restoration may be unfairly favoring the insider deal.

For its part, Restoration

demanded that Sears, which owns a 13.7% stake in the retailer and is its largest shareholder, must agree to a so-called stand-still agreement. Such a contract typically limits a company from buying shares in a target to prevent a hostile takeover.

Monday's filing shows that Sears acquiesced and the two sides have reached a confidentiality agreement that will likely clear the way for Sears to outbid Catterton for the Restoration Hardware brand.

Observers speculate that Sears' chairman, hedge fund magnate Ed Lampert, sees Restoration as a chance to add a quality brand to his company's department stores for a bargain price. Moreover, based on his success with the Land's End brand, investors say that Lampert likes direct-to-consumer retailing, where Restoration has had some traction.

Overall, Restoration is floundering amid the U.S. housing downturn. On Monday, it reported a third-quarter loss of $15.2 million, or 39 cents a share, widened from a loss of $5.7 million, or 15 cents a share, last year.

Its revenue rose 11% to $173.7 million, mainly because of growth in the direct-to-customer segment. Direct-to-customer revenue climbed 71% to $97.2 million.

"Weakening consumer spending and traffic levels continued to affect our business in the third quarter, particularly higher ticket durable categories," said Friedman in a press release. "Revenue did not achieve our expectations, driving substantially all of our larger than anticipated operating loss in the quarter."

Shares of Restoration Hardware recently were down 6 cents, or 0.8%, to $7; shares of Sears Holdings were down $1.92, or 1.7%, to $113.15.