12/12/2020 Sears Holdings: How To Buy 17 Dollars For 17 Cents (OTCMKTS:SHLDQ) | Seeking Alpha

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Sears Holdings: How To Buy 17 Dollars For 17 Cents

Dec. 4, 2020 9:42 AM ET257 comments | 20 Likes
by: Eric Moore

Summary

Sears Holdings and the UCC have over $1.3 Billion in cash from the sale of Innovel Solutions in the
unencumbered assets account and 300M in new money.

According to tax expert Robert Willens, the net value of net operating losses and tax credits is worth at least
$2.2 billion.

Sears Holdings' common stock is currently worth at least $17 a share in cash, net operating losses, and
unencumbered asset proceeds.

Sears shareholders and bondholders should view ESL as its parent company and guarantor of the
unsecured debt.

This article was amended on 12/8/2020 to reflect a correction related to the sourcing of
key documents.

This is another update article on Sears Holdings (OTCPK:SHLDQ). This is my eighth post-
bankruptcy article, and because things are moving faster now, I will be writing about Sears
on a regular basis.

Because of the complexity of 368 tax reorganizations, and the difficulty in valuing the
many non-retail businesses owned by Sears prior to bankruptcy, few investors realize that
billions of dollars of value is left at the company and/or due to the company from the sale
of the prepetition unencumbered assets. The challenge for most is getting past the drastic
decline in stock price and getting to the company's value. In the end, valuation is all that
matters. The stock price in 2012 or 2016 doesn't matter now.

I have over 25 years' experience as a bankruptcy consultant and debt buyer in complex
bankruptcy cases, so I am investing within my circle of competence. I made over 30X
investing in General Growth Properties' (BAM) bankruptcy in 2009 during the Great
Recession (this is documented in previous Sears articles). This opportunity is much
greater than my investment in General Growth Properties.

If you do not invest for the long term and/or do not buy stocks based on gross
undervaluation, buying more of a stock after a decline of 99% seems counterintuitive.
Most investors would feel a great loss instead of just doing another valuation and buying
more if a disparity still exists or, in this case, has gotten significantly wider. Finding a

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company within my circle of competence, trading for 17 cents a share but worth at least
$17, is extremely rare and may never happen again in my lifetime, so I am all in with
Eddie Lampert with no doubt whatsoever.

Eddie S. Lampert and Eric L. Moore after the last annual meeting

ESL Investments is the Parent of Sears Holdings

If you analyze Sears Holdings in isolation and not in relation to its parent, ESL
Investments, you will see what appears to be a "Dying" and/or "Failed" retailer with
significant outstanding debts entering into its 26th month in bankruptcy.

However, if we view Sears as a subsidiary having outstanding debts to its parent

company, ESL, a few others and billions in prepetition unencumbered assets, this creates
a very different financial and legal scenario for all constituents. This distinction also
changes who is ultimately liable to the PBGC for the unfunded pension liability.

This distinction also changes the tax effect of the sales transaction which transferred
substantially all of the assets of Sears Holdings to Transform Holdco for $5.2 billion
(another wholly-owned subsidiary of ESL).

When using this view, the sales transaction between ESL Investments and Sears Holdings
is more akin to a parent company transferring assets from one subsidiary to another,
because ESL controls Sears Holdings and Transform Holdco, and as far as ESL is
concerned, nothing has changed. Below is a list of the entities in the ESL Group of
companies:

ESL owns and/or controls 100% of Transform Holdco (New Sears).

ESL owns and/or controls 48.4% of Sears Holdings Stock (Old Sears).
ESL owns and/or controls 68% of Lands' End (NASDAQ:LE) Stock.

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ESL owns and/or controls roughly 68% of Seritage Growth Properties (NYSE:SRG).
ESL owns and/or controls 100% of Sears Hometown and Outlet Stores.

Because of Eddie Lampert and ESL's control position and control and/or ownership of
over 50% of these entities, we must view it as the legal parent of Seritage Growth
Properties, Lands' End, Sears Holdings, Transform Holdco (New Sears), and Sears
Hometown and Outlet Stores.

When we view Sears as a subsidiary of a solvent parent company, with cash, real estate,
marketable securities and other valuable and/or profitable subsidiaries, the financial and
legal picture for creditors and shareholders is drastically different.

For example, paying off and/or reinstating and extending the maturity of the outstanding
non-ESL/Cyrus Investment bond debt of roughly $600 million owed to a subsidiary with a
parent company with over $9 billion in assets is not a herculean task.

In fact, the Pension Benefit Guaranty Corporation views ESL as the parent company of
Sears Holdings, and therefore it and/or the other subsidiaries are legally responsible for
the pension underfunding, not Sears Holdings alone. See Controlled Group Liability
ERISA § 4062(A) [29 U.S.C. § 1362].

Sears Holdings received a $1.2 billion cash infusion

Unbeknownst to most shareholders, the company received a cash infusion of $1.2 billion
from ESL in February 2019 and rolled over the Junior DIP of 350M (which included the
previously unencumbered assets) (See document 2355-1 Page 607) and (Doc 2355-1
Page 621). (See also Doc 2355-1 page 604- 610)

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The cash received must be distributed pursuant to the bankruptcy

plan
Sears Holdings disclosed in its Chapter 11 Plan that it desires to complete a 368(A). Tax
reorganization Doc 1730 Page 22 reads in part:

Whereas, the parties desire and intend that the transactions set forth in this
agreement, together with the Bankruptcy Plan (as defined below),will unless buyer
elects otherwise pursuant to this agreement,(i) constitute one or more plans of
reorganizations thereunder and (ii) satisfy the ownership requirements set forth in
section 382(L)(5)(A)(ii) of the code.

When we take a look at the asset purchase agreement (document 1730 page 32), we see
that the cash and securities received by Sears Holdings must be distributed pursuant to
the bankruptcy plan. Below is an excerpt from page 32:

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"Distribution Requirement" shall mean the requirement that each Seller (except if
and to the extent (x) Buyer elects, in accordance with this Agreement, that the
transactions set forth in this agreement with respect to such seller shall not be
treated as a tax reorganization, or (y) if requested by such seller, designated tax
advisor is unable to deliver a tax opinion that the transactions set forth in this
agreement with respect to such seller may be treated as a tax reorganization).

Shall distribute the securities consideration received by it to Persons qualifying as

holders of “securities” of such Seller for purposes of section 354[1] of the code.

Shall distribute all of the cash[3] received pursuant to Section 3.1(a), as well as all of
its other property pursuant to the Bankruptcy Plan.

Shall dissolve no later than the end of the third taxable year ending after the Closing
Date.

Conclusion
ESL disclosed that if all of its Sears Holdings debt and warrants were converted to equity,
it would own 73.6% of Sears Holdings or roughly 156,724,205 shares of common stock.
This means that roughly 206,000,000 outstanding shares will exist.

Eddie Lampert has already contributed $1 billion in cash to Sears Holdings from the sale
of Innovel solutions, and $300M in new money from the rollover of the Junior DIP (See
Doc 2355-1 Page 608) and $35 million to the unsecured creditors committee as credit bid
consideration. (See Doc 1730 page 7 attached below) The residual assets of the debtor
from the Junior DIP roller including Innovel, go to unsecured creditors and shareholders)
See Doc 2355-1 Page 609 quoted below Junior DIP Facility

$230mm of facility to be rolled-over into NewCo in exchange for ownership interests

in NewCo Remainder of facility to receive sale proceeds or other cash payout from
the residual assets of Debtors.

See Eric's notes 50 attached at the bottom of the article to see documentation of how the
sale of prepetition unencumbered assets are allocated to unsecured creditors and
eventually shareholders. The mainstream financial press missed this, because they are
still following the narrative that Sears is only a "dying retailer" or a "zombie company," not
a diverse group of valuable individual companies with very valuable owned/leased real
estate. (See my first article here).

I am still a buyer of stock, bonds (and warrants if anyone sells their recovery rights to me).
Assuming 206,000,000 shares, I believe the stock is worth at least $17 a share because
of:

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1. The sale of Innovel solutions for $1 Billion, New Money of $300M and other upcoming
unencumbered asset sales
2. The $2.2 billion in net operating losses and tax credits (covered in this article) and
based on information provided by Robert Willens, president of the tax and consulting
firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia
University Graduate School of Business.
3. The sale of prepetition unencumbered asset proceeds. (See Eric's notes 50 attached
below)
4. The sale of prepetition encumbered assets above lien value.

I attributed no recovery in the ongoing lawsuit between ESL and Sears Holdings and the
unsecured creditors committee.

My next article will do a deep dive on the potential unencumbered asset recoveries and
their valuation, but here is a hint: The list of previously unencumbered assets are
conservatively worth more than $3 billion. One of them sold for $1 billion already. Stay
patient and invest at your own risk.

I have attached a few of the key bankruptcy documents, articles and other research
documents to assist you in your research journey.

DOC_1730_ASSET_PURCHASE_AGREEMENT.pdf
Bankruptcy_s_Corporate_Tax_Loophole-NOL_s_LARGE_PRINT.pdf
SHLD_DOC_3596_APRIL_2019.pdf
SHLDQ_DOC_3199_MOR_MARCH_2019.pdf
SHLDQ_DOC_2785_MOR_JAN_FEB_2019.pdf
368_A_1_Reorganization_With_a_drop.pdf
SHLDQ_955-2.pdf
SHLDQ_DOC_866_JUNIOR_DIP_DECLARATION_REICKER.pdf
SHLDQ_DOC_865_JUNIOR_DIP_DECLARATION.pdf
SHLDQ_DOC_872_JUNIOR_DIP_MOTION.pdf
ERIC_NOTES_19_Doc_1730_Page_10_Closing_Conditions.pdf
ERIC_NOTES_50_UNENCUMBERED_ASSETS_PROCEEDS_GO_TO_UNSECURE
D_CREDITORS_AND_SHAREHOLDERS_FINAL.pdf
SHLDQ_955-2.pdf

Disclosure: I am/we are long SHLDQ. I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is
mentioned in this article.

Eric Moore's ratings on SHLDQ

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Latest rating: Very Bullish Very Bullish Bullish Neutral Bearish Very Bearish

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