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Parent company to sell-off half of its stake in Sears Canada PDF Print E-mail
Written by Michael J. Knell   
TORONTO (17 May 2012) - Sears Holding Corporation will reduce its stake in its Canadian operations from 95% to 51% by transferring approximately 45.1 million of its shares to other shareholders, a move some observers says is part of an effort by to keep itself funded while restructuring its own operations.

The Hoffman Estates, Illinois-based and publicly-held operator of U.S. department stores Sears and Kmart said once this transaction is concluded - probably sometime later this year if it receives the necessary government agency approvals in both Canada and the United States - it may divest its holdings in Sears Canada entirely. Once the spin-off is completed, Sears Canada would continue to be listed on the Toronto Stock Exchange.

Many analysts have been describing Sears Canada's overall performance as "weak" while noting the multi-channel retailer has yet to devise a winning strategy in an increasing competitive retail environment. In the newly published 2012 edition of its Major Market Retail Report, KubasPrimedia suggested strongly that Sears Canada - along with Wal-Mart Canada - will be the most vulnerable when cheap-chic Target opens its first stores north of the border in March 2013.

Meanwhile, Sears Holdings has been shedding other assets in the United States in an attempt to bolster its balance sheet. It recently spun-off its Orchard Supply Hardware subsidiary and has announced plans to spin-off its Sears Hometown dealer store network south of the border.

For the first quarter of its fiscal year, which ended April 28, Sears Holdings declared earnings of US$189 million, or US$1.78 per share, compared to a year-ago net loss of US$170 million, or US$1.58 per share. The company said its earnings were boosted by the sales of stores and leaseholds that generated roughly US$440 million.

It wasn't clear if that latter figure included the C$164.3 million earned when Sears Canada sold the leases on three downtown stores - in the Vancouver Pacific Centre, the Calgary Chinook Centre and the Ottawa Rideau Centre - back to their owner, Cadillac Fairview Corporation. Sears Canada also sold off its independent retailer service provider - Cantrex Group - late last month.

Sears Holding's overall revenues fell 2.8% to US$9.3 billion, which the company attributed to declining comps as well as to the simple fact that were are fewer Sears and Kmart stores in operation at the end of the quarter than there were a year ago.

Same store sales fell 1.0% at Sears and 1.6% at Kmart - both outperforming Sears Canada, where same store sales fell 6.3% during the same period.

Retail analyst John Williams of the Toronto-based J.C. Williams Group Ltd. told Global News the decision to divest a good chunk of its stake in its Canadian subsidiary is part of a strategy to keep Sears and Kmart funded while Sears Holding restructures its operations.

"Sears Holdings continues to announce plans of changes and upgrading to their stores and Sears Canada is a pretty small portion of the total company," Williams said in an interview, noting that Sears Canada has several solid assets and retains a fair degree of brand equity in its product assortment.

However, the spin-off announcement did take some Canadian retail observers by surprise because Sears Holding upped its stake from 55% in 2005 to 95% last year after fighting a number of battles with minority stakeholders including one with hedge fund manager William Ackman and his Pershing Square Capital Management.

"Many thought Sears Canada would be privatized within the next several years," Keith Howlett of Desjardins Capital Markets said in a note to clients.

However, control of Sears Canada will remain with Sears Holdings and its controlling shareholder, Edward Lampert, who owns directly or through his hedge fund about 61.8%of Sears Holdings for the time being. After the spin-off, Lampert would control 27% of Sears Canada, other public shareholders of Sears Holdings would hold 17% while an existing minority shareholder of Sears Canada would control 5%.

Howlett also believes that Sears Canada's new senior management team - including Calvin McDonald, who was named president and CEO last summer - have been given at least two or three years to turn things around.

"This was not necessarily what minority investors in Sears Canada had expected. However, it should boost management and employee morale as the organization girds itself for battle with Target, Lowe's and Wal-Mart," he said.

In a statement, McDonald said the transaction would benefit Sears Canada.

"We are looking forward to working with Sears Holdings on its plan to pursue a partial spin-off of its shares in Sears Canada," he said, adding, "While we have benefited from a close relationship with Sears Holdings, we believe this distribution would provide an increased focus on our performance as an independent company and enhance the liquidity of holders of Sears Canada's common shares."

One of the major differences between Sears Canada and its U.S. parent is the former's greater strength as a big-ticket home goods retailer. Sears Canada consistently claims to be the number one seller of furniture, mattresses and appliances north of the border. While Sears in the U.S. is a strong player in the white goods category, it isn't believed to be a major furniture provider and is ranked in the 11th place spot on Furniture/Today's list of leading bedding retailers.

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