Lawsuit Alleges Latest Lampert Deal Would Make Sears Insolvent

Many shareholders do not find Eddie Lampert’s latest scheme to squeeze a few more bucks out of Sears Holdings (NYSE: SHLD) very amusing. A shareholder class action suit alleging that Lampert’s plan to raise $2.5 billion by selling Sears’ stores to a real estate investment trust (REIT) is really a scheme to destroy the iconic retailer has been filed.

If the deal succeeds, Sears would be left as an insolvent, money-losing, debt-laden renter in its own stores, the attorneys behind the suit charge, The Chicago Tribune reported. The deal would start by selling 254 Sears’ properties to the REIT Seritage Growth Properties , which would lease the stores back to Sears.

Lawsuit Alleges Latest Lampert Deal Would Make Sears Insolvent

“The proposed transaction is a financially and structurally unfair deal,” the lawsuit says of the Seritage scheme. “Sears and its stockholders would receive a severely inadequate cash payment that the defendant Lampert-controlled company may use to cover operating losses and debt obligations for another year or so, before stockholders are left holding the bag in an insolvency widely viewed as inevitable if the proposed transaction occurs.”

The suit was filed on Friday, May 29, in Delaware Chancery Court, according to The Tribune. Lampert himself, Sears Holdings, Sears board members and Seritage are named as defendants. The lawsuit is the handiwork of San Diego law firm Robbins Arroyo LLP, which proudly calls itself a “leader in shareholder rights litigation” on its website.

The objective of the litigation is to block the transfer of the stores to Seritage. The suit claims Sears would become insolvent if the transfer goes through as planned. The Seritage deal is supposed to go into effect sometime this month, according to The Tribune.

It is not clear how the lawsuit would affect another Lampert real estate scheme designed to raise $400 million by selling off another group of Sears stores. Although it would presumably block all of Lamperts’ efforts to sell real estate to raise cash which seems to be the only way that Sears can make money these days.

In April Lampert unveiled plans to set up joint ventures with mall operators like the Macerich Company (NYSE: MAC), General Growth Partners (NYSE: GGP) and the Simon Property Group (NYSE: SPG). The mall operators would buy Sears stores in their properties and rent them back to the retailer through the joint ventures. The mall owners would also get the right to rent some of the Sears space to other tenants.

Is Sears Close to Insolvency and the Beginning of the End?

The suit contradicts Lampert’s claims that he has raised the cash needed to save Sears. In a recent blog post, Lampert boasted that he has raised the billions needed to save Sears by selling off the chain’s assets.

“Taken together, these new funds will allow us to invest in long-term strategies to enhance our members’ experiences and expand our integrated retail platforms,” Lampert wrote of the real estate deals and the spinoff of assets like Lands’ End.

That sounds good until you take a look at Sears’ financial numbers. Sears reported a net income of -$1.5 billion on April 30, 2015. If that wasn’t enough, Sears’ revenue fell by $6.42 billion between April 2014 and April 2015. Sears’ TTM revenue was $35.62 billion in April 2014 and $29.2 billion on April 30, 2015.

Sears’ TTM revenue was dropping at a rate of 25.3% on April 30, 2015. If that rate keeps up, Sears’ revenues would drop by around $9 billion over the next year or around $2.277 billion a quarter.

If those revenue drops continue, Lampert’s schemes will do little to help Sears. Lampert himself admits that the Seritage deal would only raise around $2.5 billion—the equivalent of a quarter’s losses. The joint ventures would only raise around $400 million, or less than 25% of one quarter’s revenue loss, according to Lampert.

With losses like that, it is hard to see how Lampert’s real estate deal-making could save Sears. The new funds would cover a little over one quarter’s revenue losses.

The Robbins Arroyo prediction of insolvency because of the real estate deals sounds a little too optimistic when you take a look at these figures. If the revenue losses continue, Sears is headed for insolvency with or without the Seritage and other deals.

It looks as if we’re witnessing the beginning of the end at Sears. One has to wonder how long this tragedy can continue and how much money Eddie Lampert and others will burn through before somebody pulls the plug.