Sears Holdings Responds to Sears Canada's Directors Circular; Sears Holdings Believes Its Offer Is Fair and Remains Committed to Its C$16.86 Offer
Recommendation Constrained By Flawed Valuation
Senior Management Sold Majority Of Stock Below Offer Price
Sears Holdings Corporation (NASDAQ: SHLD) today responded to the recommendation of the Special Committee of the Board of Directors of Sears Canada (TSX: SCC) to reject its offer.
Alan Lacy, Vice Chairman of Sears Holdings commented: "We are disappointed that the Special Committee has recommended against our offer; however we recognize that the Special Committee was constrained in its ability to recommend that shareholders accept our offer as a result of the valuation range contained in what we believe to be a flawed valuation report. The optimistic expectations for Sears Canada's business that form the basis for the valuation report are unrealistic and inconsistent with the increasingly competitive retail market in Canada. We remain committed to our C$16.86 offer, which we continue to believe represents a full and fair price for the Company."
Sears Holdings suggests that shareholders should consider whether the following actions are consistent with the Genuity valuation report, which is the principal underpinning of the Special Committee's recommendation:
* In September and November 2005, members of Sears Canada's senior
operating management, including the Chief Executive Officer, sold over
60% of their holdings at an average price of C$13.58, after adjusting
for the December C$18.64 distribution. As outlined in the Director's
Circular, senior management, who are not constrained by the valuation
report, has not made a determination to reject our offer.
* The six directors who comprise the Special Committee have failed to
purchase any shares of Sears Canada in the last three years, with the
exception of a single purchase of 1,000 shares in 2004. In addition,
Sears Canada offers its directors the option of receiving their annual
compensation in either stock or cash, and all but one of the members of
the Special Committee have rejected shares and elected 100% cash in
each of the last three years. Sears Holdings notes that the share
price twelve months ago was C$17.295, and averaged C$15.14 for the
prior two years, less than half of the combined C$35.50 value of the
offer and the December C$18.64 per share distribution, and suggests
that if the Independent Directors had believed the value of Sears
Canada was more than twice the then trading value, the Independent
Directors would have purchased or elected a greater number of shares.
* Not until the Sears Holdings employees who serve on the Board of
Directors of Sears Canada ("Sears Holdings Directors") initiated the
sale of the credit card business and the subsequent cash distribution,
did the Board of Sears Canada or any of the Independent Directors seek
to take the actions that one would expect in the event that a board
believed the shares were trading at a significant discount to the value
of the company. In particular, in the last five years Sears Canada has
only repurchased a total of approximately one half of one percent of
the outstanding shares.
* Several of the Independent Directors were reluctant to approve either
the sale of the Sears Canada credit card business or the December
special distribution of the sale proceeds because of concerns regarding
the prospects of the retail business. As a result, they specifically
conditioned their approval of the distribution on receiving a solvency
opinion from the Company's Chief Financial Officer.
"Now that all Sears Canada shareholders have enjoyed an increase in the value of their common shares from the sale of the credit card business and the cost reduction initiatives, Sears Holdings is offering all shareholders liquidity at a price that represents a significant premium to historical trading values," said Mr. Lacy. "Our offer has the support of Natcan, the largest minority shareholder of Sears Canada, who actively negotiated the price, which is at a significant premium to the prices at which Sears Canada's senior management recently sold shares."
Mr. Lacy concluded: "We have owned over 53% of Sears Canada for more than 20 years and, if necessary, we are comfortable continuing to own less than 100%. On March 17, 2006, shareholders will only have two choices: either tender to the Sears Holdings offer or continue to hold shares, which we believe will thereafter trade at a significant discount to our offer."
Issues Raised by the Special Committee
Sears Holdings Directors have responded to certain specific issues cited by the Special Committee in its recommendation in the Directors' Circular. Their response is included in Schedule B to the Directors' Circular. In particular, the Sears Holdings Directors believe that the implementation of cost reductions by Sears Canada and the new arrangements with JP Morgan Chase for the credit card business were known to the market and had been factored into the price of Sears Canada's common shares before the announcement of the offer. In addition, Sears Holdings does not believe that there are further material benefits that would accrue to Sears Holdings as a result of owning 100% of Sears Canada's Common Shares beyond what is reflected in the Offer.
Genuity Response to Offer Circular
In its Offering Circular, Sears Holdings sets forth its belief that the Genuity valuation report is flawed, including the projections they developed based on a number of unrealistic assumptions. In particular, Sears Holdings points out that:
* Genuity continues to fail to adjust its valuation range to reflect that
the Sears Canada name and key brands are, in fact, owned by Sears
Holdings and currently licensed to Sears Canada on a royalty-free
basis. When Sears Holdings informed Genuity on February 2, 2005 of the
existence of the contract governing Sears Canada's right to use the
Sears name and Sears brands, Genuity admitted that it had not reviewed
the contract, but had assumed that Sears Canada would continue to have
the rights to these brands indefinitely. After reviewing the contract,
Genuity declined to adjust its valuation asserting that any such
adjustment would be too "speculative" and implying that a third party
purchaser would pay full value for Sears Canada without receiving any
of its key brands, including the "Sears" name. Unlike the
inappropriate examples of Woolco and Aikenheads suggested by Genuity,
Sears is one of the most valuable brands in Canada and product sales
under the "Kenmore", "Craftsman" and "Die-Hard" brands represent a
material proportion of Sears Canada's revenues.
* Genuity also continues to refuse to provide an accurate multiple for
the recent Hudson's Bay Company transaction, despite suggesting that it
is the most comparable transaction and admitting that the multiple
currently included in its valuation report should be adjusted downward
to reflect the recently announced credit card sale. Further, Genuity
comments that calculation of the multiple is "speculative" or
"potentially misleading" without non-public information, and that
direct comparison with Sears Canada is "difficult", but then specifies
a valuation for precedent transactions, which relies very heavily on
this admittedly incorrect multiple. As Sears Holdings described in its
Offer Circular, an appropriately adjusted HBC transaction multiple,
reflecting the increasingly competitive retail environment in Canada
and the expected continued loss of market share by department stores to
off-mall competitors, applied to Sears Canada would produce values
below Sears Holding's offer.
* Sears Holdings previously noted that Genuity's projections are based on
a significant and unrealistic reversal of the decline of Sears Canada's
financial performance. Genuity now attempts to defend its projections
by basing future growth assumptions on the revenue growth of Sears
Canada over a 10 to 15 year period. This completely ignores the recent
and dramatic change in the competitive landscape in Canada and bases
assumptions on an historical 15-year period that dates back long before
the enormous, detrimental impact of formidable competitors such as Wal-
Mart, Home Depot and Best Buy and the relatively rapid growth of
competitors such as Canadian Tire, Rona and Reitmans. In addition,
Genuity selects an inappropriate period of time that includes the
addition of approximately $600 million in sales from Sears Canada's
acquisition of Eaton's and another $800 million of sales that can be
attributed to 207 new Home and Dealer stores opened between 1991 and
2005. Genuity's attempt to defend its projections by relying on 15-
year revenue growth rates and ignoring acquisitions and store additions
is unconvincing, and calls into question the other aggressive and
unrealistic assumptions underlying its Base Case projections.
* Genuity does not address the reduction in gross margin that Sears
Holdings pointed out will result as the balance of sales continues to
shift to appliances, the only area with increasing sales, and away from
soft lines that carry a 700 basis point higher gross margin.
* Genuity also attempts to provide some support for its projections by
referring to the fact that Sears Holdings initiated and was aware of
the cost reduction exercise at Sears Canada. This too is misleading.
While the Sears Holdings Directors requested that management set long-
term goals for cost reductions, the Sears Holdings Directors did not
set or approve the goals. Sears Holdings is concerned that it has not
seen any significant progress on the cost reductions, with the
exception of the headcount and advertising reductions. In fact,
included in Genuity's projected cost savings are ambitious plans to
increase gross margin through better purchasing, reduced returns, and
lower warranty costs. Sears Canada has attempted to reverse the
negative trends in gross margin over the last five years without
success because of the increased competitive and price pressures in
Canada. As a result, Sears Holdings questions whether Sears Canada
will achieve any meaningful success in the efforts to reduce these
elements of costs of goods sold, let alone sufficient success to off-
set the competitive and balance-of-sale pressures on gross margin.
Sears Holdings is offering to acquire any and all of the outstanding common shares of Sears Canada Inc., other than those already held by Sears Holdings and its affiliates, for C$16.86 per share in cash. Sears Holdings currently owns approximately 53.8% of the outstanding shares of Sears Canada. The offer is open for acceptance until 8:00 pm Eastern Standard Time on March 17, 2006. While the offer is subject to customary conditions, it is not subject to a minimum tender condition. Sears Holdings will acquire any and all shares validly tendered to its offer prior to the expiration date.
About Sears Holdings Corporation
Sears Holdings Corporation is the third largest broadline retailer in North America with approximately $55 billion in annual revenues, and with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It also has Martha Steward Everyday products, which are offered exclusively in the U.S. by Kmart and in Canada by Sears Canada. The company is the nation's largest provider of home services, with more than 14 million service calls made annually. For more information, visit Sears Holdings' website at .
SOURCE: Sears Holdings Corporation
CONTACT: Sears Holdings Public Relations, +1-847-286-8371
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