Sears' Lampert Finds a New Foe

A battle for Restoration Hardware once again pits the hedge fund guru against a big investor.
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In his bid for

Restoration Hardware

(RSTO)

, Ed Lampert is butting heads with yet another investment maven.

He acquired Sears Roebuck just weeks after Steve Roth's real estate investment trust,

Vornado Realty

(VNO) - Get Report

, disclosed a 4.3% stake in the retailer in 2004. Later, he clashed with Bill Ackman of Pershing Square Capital in his bid to acquire Sears Canada in its entirety.

Now Lampert, the hedge fund superstar who is also chairman of

Sears Holdings

(SHLD)

, is in a battle with Catterton Partners, a consumer-focused private-equity firm based in his own stomping grounds -- Greenwich, Conn.

They're fighting over Restoration Hardware, a beat-up, high-end home furnishings retailer that has put itself up for sale in the midst of a massive downturn in the U.S. housing market that is weighing on home goods retailers from

Lowe's

(LOW) - Get Report

to

Target

(TGT) - Get Report

.

Catterton has the inside track over Lampert, having teamed up with Restoration Chairman and CEO Gary Friedman -- a merchandising genius credited with building

Williams-Sonoma

(WSM) - Get Report

into an arbiter of good taste. Together, they've signed a deal to pay $6.70 a share, or about $267 million, for Restoration Hardware, with plans to take it private and revamp its crippled supply chain, which is a drag on the retailer's financials despite its quality brand.

That deal, however, allows Restoration to entertain competing proposals from third parties through Dec. 13. Now, Lampert is signaling that his retail empire is willing to beat Catterton's per-share offer by a nickel, or maybe more, if Restoration's board will forge a confidentiality agreement and allow his team to perform due diligence.

So far, according to a filing with the

Securities and Exchange Commission

on Monday, Sears Holdings has been

shut out of the process. That doesn't sit well with the Sears and Kmart owner, which bought a 13.6% stake in Restoration Hardware after the Catterton deal was announced.

Sears Holdings' lawyer, William Crowley, said in a letter to a Restoration board committee that he is "concerned by certain aspects of the management and director-led buyout."

"We note in this regard that you entered into a confidentiality agreement with the private equity leader of the insider group on July 20, and apparently have been focused exclusively on the insider deal since that time rather than exploring our known interest," wrote Crowley. "We believe that providing us with information and the opportunity to offer all stockholders more consideration than they would receive pursuant to the current merger agreement would be in their best interest."

Based on the public information available, Crowley said in the letter that Sears Holdings is "prepared to enter into an agreement" to offer $6.75 a share in cash to Restoration's shareholders, though Sears does not "understand your requirement that we submit such a proposal prior to providing us with due diligence information."

Catterton's $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. But with Restoration's shares trading Monday at over $7, investors are betting on a bidding war between the private-equity firm and the Guru of Greenwich.

Sears Holdings, through a spokesman, declined to comment, as did Catterton and Restoration Hardware.

In addition to topping Catterton's offer, Sears said in its letter it would offer "a lower, more reasonable break-up fee" in its buyout offer, suggesting that Restoration's board could be shortchanging shareholders by charging them too steep a fee for backing out of the director-led buyout deal.

"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."

For their part, Sears shareholders were none too pleased to learn that Lampert is making a play for a home-furnishings retail chain with just $713 million in annual revenue. Such a transaction hardly qualifies for the kind of master stroke that speculators are expecting from Lampert in order to get Sears shares moving again.

Its stock is down 39% since its highs in early May, and on Monday it lost $4.81, or 4.3%, to $107.77.

Lampert's other investments, like

Citigroup

(C) - Get Report

and

Home Depot

(HD) - Get Report

, also have come unraveled over the summer amid the credit crisis and a consumer-spending slowdown, but he seems

unfazed by Wall Street's worries.

While short-term investors have been hurt, long-term Lampert disciples say he will continue to repurchase shares of Sears at a valuation that he views as favorable while he looks for other plays for the retailer's cash flow.

While Restoration is far too small to become a factor in Sears' valuation, analysts say Lampert may feel he can use the brand the way he used Land's End, which has been a winner for Sears since he took over.

"Like Land's End, Restoration Hardware has been established as a pretty well-regarded brand in terms of the merchandise," says RBC Capital Markets analyst Scot Cicarrelli. "They have a severely damaged supply chain, and Lampert may see an opportunity to move it into the Sears stable at a discount and create synergies with his existing supply chain."