Sears Holdings' bid for Canada unit blocked

Date: Monday, August 21, 2006
Author: David Clarke, InvestmentNews.com

OTTAWA - Ontario's securities regulator has thwarted Sears Holdings Corp.'s effort to complete a controversial $805.4 million buyout of its Canadian subsidiary Sears Canada Inc. of Toronto.

The Ontario Securities Commission ruled Aug. 8 that among other infractions, Hoffman Estates, Ill.-based Sears Holdings violated the province's securities law by failing to disclose information related to support agreements struck with the Bank of Nova Scotia and the Royal Bank of Canada, both of Toronto, and U.S. investment fund Vornado Realty LP of New York.

The OSC ruling "will change corporate-finance practice across North America, or has the potential to," said takeover specialist Jonathan Levin with Toronto law firm Fasken Martineau DuMoulin LLP.

In an Aug. 9 statement, Sears Holdings said it would appeal the ruling to the Divisional Court of Ontario.

"We believe that we, as well as the Canadian banks who agreed to support the transaction, acted in full compliance with Ontario securities laws and practice throughout this process," the company said in the statement. "We also believe that we fully complied with our disclosure obligations."

The takeover bid pitted Sears Holdings chairman Edward Lampert, a hedge fund manager who took Kmart Holdings Corp. of Troy, Mich., out of bankruptcy in 2003, against such shareholders as William Ackman, managing partner of New York-based hedge fund Pershing Square Capital Management LP.

"This decision protects the rights and interests of all minority shareholders of Sears Canada," according to a joint statement by dissident shareholders Pershing Square, New York's Hawkeye Capital Management LLC and Knott Partners Management LLC of Syosset, N.Y.

In April, this group said they would join forces to oppose the Sears Holdings offer. At that time, they said, they collectively owned about 7.7% of Sears Canada's outstanding common shares.

Sears Holdings owns 46% of Sears Canada. It needed a majority of the minority shareholders to vote in favor of the deal.

In its decision, the OSC said tentative agreements with shareholders that could influence the outcome of a bid are "fundamentally important" and should be disclosed.

The OSC concluded that in entering the support agreements, the banks were provided "consideration of greater value" than other Sears Canada shareholders, as they stood to receive millions of dollars in tax benefits. It also noted that a congratulatory e-mail from Sears Holdings' financial adviser to the company's top executives April 6 was indicative of the "purpose and effect" of the agreements.

That e-mail stated: "Today's announcement will surprise the market, and given our conversations with the analysts and institutional shareholders, it will catch most off guard. In fact, the rather unique tactic of securing the support of the majority through the derivatives trades and support agreements will make this transaction one of the most intriguing Canadian M&A trades in a long time."