Running Out of Time and Money
BALTIMORE – We are looking ahead. And coming together is not only a clearer picture of how Trump’s reflation might turn out – but also a better understanding of what has gone wrong with the whole economy.
The famous Sears Tower (now Willis Tower) dominates the Chicago skyline. Its former owner Sears Holdings is on the ropes after being in business for 130 years. What happened?
Photo credit: Carol Highsmith
Over the next three days, we’ll look at a few of Trump’s money men. Then, we’ll conclude the series with a guess about what will happen when these fellows get to Washington.
When we were growing up, we shopped for nearly everything at Sears stores. If it wasn’t in the stores, we ordered it from Sears’ big catalog. The latter was a marvel, where we saw all the things America’s Main Street had on offer at the time. That’s where we did our Christmas shopping.
But looking at a chart of Sears’ stock over the last eight years is like looking at a photo from Aleppo. From nearly $200 a share, it now trades for just over 10 bucks. What happened?
How could such a great company – owner of Kmart as well as its own Sears’ stores – anchoring malls all over the country with title to some of the choicest commercial space in the nation and owner of the brands we grew up with – including Kenmore appliances and Craftsman tools.
How could such a company suddenly put itself into what looks like a death spiral?
A chart like a photo of Aleppo: Sears Holdings, monthly. After ailing Kmart took over likewise ailing Sears, Roebuck & Co., the merged company was renamed and re-listed as Sears Holdings. In the first three years after the merger, it looked like things might work out – but that soon turned out to have been an illusion. Over the past four years it has lost around $8 billion – click to enlarge.
Business Insider reports:
According to a recent report by The Wall Street Journal, toy maker Jakks Pacific Inc. recently suspended sales of its products to Kmart, which is owned by Sears Holdings, due to worries about the company’s financial health…
Fitch Ratings in October identified Sears as one of seven major retailers at risk of going bankrupt in the next 12 to 24 months and eventually liquidating.
In September, Moody’s analysts downgraded Sears’ liquidity rating, saying Sears and Kmart don’t have enough money – or access to money – to stay in business. The Moody’s analysts said Sears is bleeding cash and will have to continue to rely on outside funding or the sale of assets, such as real estate, to sustain operations. Kmart in particular is at risk of shutting down, the analysts said.
The company is running out of time and money. It had $1.8 billion in the till a year ago. Now it has only $238 million. And $3 billion in debt. How does a company do that? How does it destroy itself… wiping out 130 years of accumulated wealth and knowledge?
The answer is to be found in fake money and the financial insiders who use it to strip out value from Main Street and move it to Wall Street.
Another terrible chart associated with Sears: In 2012 Sears Holdings decided to spin off certain stores (hardware and appliances stores) under the name of Sears Hometown & Outlet Stores. The spin-off almost immediately turned into a complete disaster for shareholders – click to enlarge.
Debt and Duplicity
First, as described here many times, fake money weakened the middle class, which shopped at Sears. The rich went to more upmarket retailers such as Neiman Marcus and Nordstrom. The poor went down to dollar stores and Walmart. Sears was left in the middle.
But the more interesting story concerns a Mr. Steven Mnuchin. Mr. Mnuchin was on the board of Sears for the past 11 years, throughout its devastating decline. He is resigning now, letting the ship go down without him. Besides, he has already stolen the silver.
How do you destroy a business? It’s not that hard. Rather than invest in new people and new methods, you take the money for yourself.
It is even more attractive if you can borrow a lot of fake money at ultra-low rates against the company’s credit, pay it out to yourself and other financiers… and then jump ship, leaving the company, its employees, and its creditors to drown in your debt.
That is what Mnuchin did. Here’s David Stockman:
[…] during the last 11 years [Sears] spent $7 billion on stock buybacks or nearly double the amounts it reinvested in maintaining and renewing its store base, which at one time numbered more than 4,000 Sears, Kmart, and other specialty store units.
In terms of sales, Sears spent less than a third as much as rival Walmart on capital improvements. Instead, insiders pumped the money into their own pockets, mainly with buybacks.
Steve Mnuchin, his pockets well lined from an 11-year stint at the Sears board that presided over the company’s death-spiral, emerges from an elevator. Guess why he’s grinning (caption contest!). Meanwhile, one of his ex-Goldman buddies helped with the Sears asset stripping operation described below. The good news is that Mnuchin can no longer harm Sears.
Photo credit: DPA
Classmates and Cronies
Then, either seeing the handwriting on the wall, or putting it there themselves… they pulled a fast one, evidently with Mr. Mnuchin’s cooperation.
Two hedge funds swooped in with a plan: They would use cheap financing to transform valuable Main Street real estate into a Wall Street asset. They set up a real estate investment trust (REIT), took the property out of the company, and put it in the REIT. [Note: a REIT is similar to a mutual fund, except that it holds property investments instead of stocks].
Sears can go broke; they will still have the company’s most valuable assets. And now they can sell the REIT to investors. And by the way, one of the two funds involved is run by a former college classmate and Goldman Sachs crony of Mnuchin’s, Eddie Lampert.
Sears property spin-off SRG, which holds 266 properties that were formerly owned by SHLD. Another well-known crony capitalist, Warren Buffett, has taken a $70.5 million stake in it. For once, a Sears-related stock seems to be doing a bit better. Sears shareholders at least did get an opportunity to purchase rights to the REIT when it was spun off. It is worth noting that while the spin-off delayed the bankruptcy of SHLD by solving its immediate cash flow and debt problems, which had become acute by 2014, it will eventually saddle the company with an even higher debt load due to soaring lease obligations. SHLD remains with another 400 properties it can “monetize” – unless its creditors grab them first – click to enlarge.
[…] the whole deal was a backdoor financing to get assets out of SHLD [Sears] prior to its impending bankruptcy. The hedge fund insiders will now have a secured senior claim through the newly created REIT, which they substantially own, rather than worthless SHLD common stock.
At least Steve Mnuchin can do Sears no more harm. Donald Trump picked him as his Treasury secretary.
Charts by: StockCharts
Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
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2 Responses to “How Do You Destroy a Business?”
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