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Is Sears Holdings Corp. Making Backdoor Play for Sears Canada?

The bankruptcy proceedings surrounding Sears Canada just got a whole lot more interesting with news reports saying that private equity interests are looking to buy the ailing retailer and keep it afloat, albeit in a much smaller package.

That’s not the surprising part. What’s amazing is who’s involved and what that could mean for Sears Holdings Corp. (NASDAQ:SHLD) shareholders.

While I doubt Eddie Lampert’s failing U.S. department store chain has many Canadian shareholders these days, if you are one of those rare individuals, you might want to start paying closer attention to the bankruptcy proceedings at Sears Canada, because if the rumours are true, Eddie Lampert could be looking to make a backdoor play.

Who’s the buyer?

According to the Wall Street Journal, former executive chairman Brandon Stranzl is working with Los Angeles-based Baker Street Capital Management — an investment firm run by Vadim Perelman, who would provide some of the equity and debt financing to buy Sears Canada out of bankruptcy.

The deal would see Stranzl and his investors buy Sears Canada for more than $650 million, cutting the store footprint to less than half the existing square footage and leaving approximately 8,000 employees with jobs.

That’s the good news.

The downside of this buyer

The bad news is that Stranzl, who brings no retail operating experience to the table, is teaming up with Vadim Perelman, a man whose wealth is shrinking by the day.

Perelman, who is 34 years old, bet the farm on a U.S. company called Walter Investment Management Corp. (NYSE:WAC). It originates and services non-bank residential mortgage loans. In March 2017, Walter announced it lost US$529 million in its latest fiscal year on US$996 million in revenue.

Baker Street Capital first started buying Walter’s stock in the first quarter of 2014 when it was trading between $25 and $35. As of March 2017, Baker Street was Walter’s largest shareholder, owning 8.7 million shares, or 24%, of its stock. Most of the shares were purchased before 2016 at prices much higher than their current value of less than a dollar. In 2013, Baker Street’s portfolio was worth US$854 million; today, its publicly traded portfolio is worth less than $5 million.

Perelman must fancy himself a turnaround specialist, because Walter has lost money in four of the last five years to the tune of almost US$700 million at a time when the U.S. residential market has been thriving.

Here’s where Eddie Lampert comes in

If you take a look at Baker Street’s holdings at the end of 2013 when its portfolio hit US$854 million, it held 15.2 million shares of SHLD, which had a value of US$749 million and represented 88% of the investment firm’s portfolio.

Brandon Stranzl once worked for Eddie Lampert’s investment firm, ESL Investments, which owns 59% of Sears Holdings and 45% of Sears Canada.

Do you see where I’m going with this?

ESL Investments’s 45% equity ownership of Sears Canada is likely worthless at this point. However, if ESL holds Sears Canada debt, it would be in line for a partial payout as part of any bankruptcy settlement including the rumoured sale.

Also, ESL could provide some or all of the equity and debt to Baker Street, who seems to have a relationship to both Stranzl and Sears Holdings; Stranzl could then turn around and buy Sears Canada, helping out his one-time boss and getting Perelman off the mat at the same time.

It’s only a theory, but an interesting one nonetheless.

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Fool contributor Will Ashworth has no position in any stocks mentioned. 

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