Sears Holdings Corp (NASDAQ:SHLD) might not hold a majority of Sears Canada’s equity anymore, but the affiliate’s bankruptcy should help those holding SHLD stock understand just how messy things are going to get in the U.S.
If Eddie Lampert thinks he’s going to get out from under his moral obligation to pay severance to longtime employees, he’s got another thing coming.
Let me be clear, I’m not an attorney, nor am I an expert on bankruptcy law in either country, but I do know a thing or two about retail, so I feel it’s necessary to say my piece on the subject.
What’s Happening in Canada is Shameful
My June 30 article about Sears Holdings touched on the bankruptcy of Sears Canada. Today, I’ll fill you in on what’s happened since then.
Are you familiar with Mike Myers, the actor?
Yes, the same Mike Myers from Saturday Night Live who went on to do the Austin Powers and Wayne’s World movies. Well, he’s from Toronto, and his brother Peter worked at Sears Canada for 35 years, most recently as senior director of planning.
On July 13, Sears Canada announced its restructuring plans as part of its bankruptcy proceedings, which included closing 59 stores and firing 2,900 people. Peter Myers is one of them. After almost four decades with the department store, Myers was getting the ax without any severance — not a penny.
Myers’ departure is especially ironic because Sears Canada’s former management asked the longtime employee on several occasions to get his celebrity brother to do a commercial.
“I said, I will do this commercial if it’s about how Sears isn’t closing,” Peter told Business News Network shortly after his dismissal. “Mike turned to me at one point when we were having a break [during the filming of commercial] and said, ‘I guess they can never fire you now.’ We laughed because it was not really a thing.”
“When I told him [about the firing], he couldn’t believe it and he really wasn’t happy,” Peter Myers revealed. “I do see the irony.”
Big Retention Bonuses for Fat Cats at Head Office
In Canada, most people are disappointed that Sears Canada is firing several thousand people but they understand that it’s just business.
However, when it was learned that none of the employees would be getting any severance — one expert suggests Myers was eligible for two years’ pay for his tenure — and the court had approved CAD$9.2 million ($7.4 million) in retention bonuses to keep the company operating during the store closures, the citizenry went ballistic.
The hashtag #BoycottSearsCanada has become a social media firestorm. The protest’s become so bad the company’s been forced to close comments on its Facebook Inc (NASDAQ:FB) page, turning the entire process into a PR nightmare.
Sears Canada is going to have a tough time getting people into its stores after this, and although the boycott will ultimately put a lot more people out of work, it’s easy to understand why people are pissed.
What Was The Court Thinking?
It’s far harder to comprehend the thinking behind the court’s decision to approve zero severance and huge bonuses.
Unfortunately, the judge who made the decision probably had no choice given Canada’s bankruptcy laws, but to approve both requests.
Now, a law firm representing more than 17,000 current and former non-unionized employees, has filed a motion for the court to disallow all but CAD$1.6 million — for those working at the 59 stores set for closing — of the retention bonuses. It claims the CAD$7.6 million set aside for 43 senior management does nothing to ensure a successful restructuring.
Ya think?
The problem is the laws, as they’re currently written, don’t allow for much wiggle room. Secured creditors rule.
“These are people whose function, whose role, Sears has deemed to be key in allowing it to restructure and liquidate and maximize that amount that it hopes to recoup for its creditors,” says Toronto labor lawyer Lior Samfiru. “It’s going to be very difficult for a court to question that judgment.”
My feeling on this subject, much like my thoughts on excessive CEO compensation, is that the importance of senior management in big business is often greatly exaggerated.
Bankruptcy laws in both countries must put employee rights on equal footing with secured creditors. Until that happens, the rank and file are going to be chewed up and spit out 100% of the time.
Bottom Line on SHLD Stock
This article might not seem to have anything to do with Sears Holdings but let me assure you it does.
Eddie Lampert is using Sears Canada’s bankruptcy as his test case to determine what course of action he should take to extract the most value for ESL Investments, his hedge fund, which owns 56.5% of SHLD stock and 32% of its long-term debt.
There’s no question that Sears Holdings’ days as a retailer are coming to a close. How this goes down, in large part, will be a reflection of what happens at Sears Canada.
Frankly, unless you own some of Sears’ secured debt as Lampert does, you’re a dead man walking. Both Sears Canada and Sears Holdings are headed to the history books.
Handle SHLD stock accordingly.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
