The next round of corporate action at Sears Holding (SHLD) is about to begin as the board of directors set today as the distribution date of the rights offerings to purchase shares of its Hometown & Outlet store spinoff. The new company is expected to trade under the ticker ‘SHOS’ and each SHLD shareholder will receive one rights offering, good for .281091 share of SHOS, for every SHLD share owned. Essentially, SHLD shareholders will be able to purchase shares of SHOS at $15 a pop. A copy of the prospectus can be found here.
The spin is expected to raise over $440m for the parent and encompasses 1,100 Hometown stores which mainly sell hardware and 122 Outlet stores which sell Sears merchandise at a discount. It will lose some profitable locations though, something which isn’t very prevalent throughout the rest of the organization. According to Credit Suisse analyst Gary Balter, the spin makes up over 25% of the parent company’s EBITDA despite accounting for just a small slice of the overall revenues. To make up for this though, as part of the transaction Sears Hometown will draw down $100m of its new credit facility in order to pay a dividend to Sears Holding. This transaction should dramatically help Sears’ liquidity position and it will use the proceeds to focus on its ‘core’ business.
The subscription rights are transferable and will trade on the Nasdaq beginning tomorrow (September 12) under the ticker ’SHOSR’. The company also announced a special deal for those who just can’t get enough SHOS. Apparently, over-subscription privileges may be available to those who exercise all of their subscription rights. This is not an insigificant detail though as ESL Investments, the fund controlled by Sears CEO Eddie Lampert and the majority shareholder, will fully participate in the rights offering. This also means that Mr. Lampert will retain control of this company much like he does with the company’s prior spin, Orchard Hardware (OSH).
This appears to be another complex corporate transaction set up by Sears to help ‘turn around’ the company which will likely confuse ordinary investors and benefit Mr. Lampert. Stone Fox Capital seems to agree and here is his take on the transaction. I haven’t really done much work on this one, but my first inclination would be to follow management despite my belief that this company has been poorly mismanaged. As these are uncommon instruments, it will be interesting to see how the rights offerings trade and they might present an intriguing opportunity. We will keep you updated as this situation progresses.
Disclosure: Author holds no position in any stock mentioned.