U.S. parent bids for Sears Canada

Date: Tuesday, December 6, 2005
Author: MARINA STRAUSS- Globeandmail.com

From Monday's Globe and Mail

Sears Holdings Corp. has bid $834.5-million to take Sears Canada Inc. private, a move some analysts say positions it to eventually scoop up rival Hudson's Bay Co. and merge the two department store companies.

Sears Holdings, controlled by U.S. hedge fund manager Edward Lampert, made the all-cash offer yesterday for the 46.2 per cent of Sears Canada it does not already own.

The offer could be the first step toward Mr. Lampert selling off Sears Canada's real estate or, down the road, buying all or part of HBC, said retail analyst Robert Gibson of Octagon Capital. Merging the two companies would create a stronger, more focused merchant.

HBC itself is the target of a $1.1-billion takeover bid by U.S. businessman Jerry Zucker.

"We're not going to have any Canadian department stores any more," Mr. Gibson said, only half jokingly.

Sears Holdings, based in Hoffman Estates, Ill., said it intends to continue operating Sears Canada as a retail business, but hopes to make it more efficient.

"On a stand-alone basis, Sears Canada's retail business faces an increasingly competitive retail environment in Canada," Alan Lacy, vice-chairman of Sears Holdings, said in a statement. He is also chairman of Sears Canada.

"Sears Canada has long been an important part of the retail landscape in Canada and, with our shared brand name, is strategic to Sears Holdings."

Sears Holdings' acquisition would give Sears Canada more economies of scale to take on U.S. heavyweights such as Wal-Mart Stores and Home Depot, Chris Braithwaite, spokesman for Sears Holdings, said in an interview.

Both Sears Canada and HBC, which owns the Bay and Zellers, have been struggling in the face of more nimble competitors.

Mr. Lampert began the process earlier this year of trying to revamp Sears Canada and squeeze more value from it for the parent.

It sold the lucrative Sears Canada credit card division to J.P. Morgan Chase & Co. for $2.3-billion -- with most of the proceeds going to majority owner Sears Holdings.

It also trimmed 1,200 jobs in a bid to slash $100-million in annual costs.

The latest move to take Sears Canada private, if approved, would inevitably lead to Sears Canada cutting costs further by folding management, distribution and other operations into those of Sears Holdings, industry sources said.

And there is no doubt that decisions are being driven by the U.S. head office: The latest one took company executives in Canada by surprise, sources said.

That was despite a board of directors meeting in Toronto on Friday to approve the distribution of money from the sale of the credit card business.

For Mr. Lampert, the latest move is an attempt to shore up his strategy amid criticism that he has failed to radically improve Sears Holdings' financial performance, analysts said.

Mr. Lampert, chairman of Sears Holdings, was seen by many investors as a financial whiz who would transform Sears as quickly as he did discounter Kmart by selling off real estate.

Mr. Braithwaite, the Sears Holdings spokesman, would not comment on the possibility of an HBC acquisition or any other potential business ventures.

Asked whether Sears Holdings has had any discussions with Mr. Zucker, Mr. Braithwaite declined to say.

"We're talking today about this offer" to take Sears Canada private.

The deal could close by February, he said.

Robert Johnston, a vice-president at Mr. Zucker's company, said there have been no talks with Sears.

Analysts expect Sears Holdings will be successful in buying up the Sears Canada's shares that it doesn't own.

Already, the parent has struck a lockup deal with Natcan Investment Management Inc. With 9.06 per cent of Sears Canada's shares, Natcan has agreed to tender all of the 9.7 million shares that it owns or controls.

Clifton Robbins, chief executive officer of Blue Harbour Group LP, one of Sears Canada's largest minority shareholders, said management delivered excellent value to shareholders with the sale of the credit business.

"A merger with Sears Holdings could be the next logical step for Sears Canada," Mr. Robbins said. He backed the decision that Sears Canada form a special committee of its board to evaluate the offer and make a recommendation to shareholders.

Sears Holdings is offering $16.86 a share after the distribution to shareholders of the $18.64-a-share dividend for the sale of the credit division.

The offer represents an 8.7-per-cent premium above Friday's closing price and a 22.2-per-cent premium over the average closing price since Aug. 31. That's when Sears Canada announced it had a deal to sell its credit business.

On the Toronto Stock Exchange yesterday, Sears Canada's shares soared $2.20 or more than 6 per cent to $36.35, a 52-week high.

Sears Holding's stock, meanwhile, rose more than 2 per cent or $2.79 to $116.71 (U.S.) on the Nasdaq Stock Market.

Holiday shopping

Sears Holdings has bid $834.5-million for the 46.2 per cent of Sears Canada that it does not already own.

What is Sears Holdings?

One of the biggest U.S. retailers with about $55-billion (U.S.) in annual revenue and 3,900 stores, it is controlled by hedge fund billionaire Edward Lampert, who also owns discounter Kmart.

Who is on side?

Montreal-based Natcan Investment Management Inc. is the largest shareholder of Sears Canada, with 9.7 million shares, or about 9 per cent of Sears Canada's shares. It has agreed to the bid.

What has been happening at Sears?

In November, its credit card division was sold to J.P. Morgan Chase & Co. for $2.3-billion - with most of the proceeds going to majority owner Sears Holdings. It has also trimmed 1,200 jobs in a bid to slash $100-million in annual costs.

'On a stand-alone basis, Sears Canada's retail business faces an increasingly competitive retail environment in Canada.'