It Was Vulture Capitalism that Killed Sears
Don’t blame Amazon or the internet. The culprit was a predatory hedge fund.
f you’ve been following the impending bankruptcy of America’s iconic retailer, as covered by print, broadcast, and digital media, you’ve probably encountered lots of nostalgia, and sad clucking about how dinosaurs like Sears can’t compete in the age of Amazon and specialty retail.
But most of the coverage has failed to stress the deeper story. Namely, Sears is a prime example of how hedge funds and private-equity companies take over retailers, encumber them with debt in order to pay themselves massive windfall profits, and then leave the retailer without adequate operating capital to compete.
Part of the strategy is to sell off valuable real estate, the better to enrich the hedge fund, and stick the retail company with costly rental payments to occupy the space that it once owned.
In the case of Sears, the culprit is a hedge-fund operator named Edward Lampert, once a senior merger guy at Goldman Sachs. In 2005, Lampert merged Sears with Kmart, loaded both up with debt, and used some of the debt on stock buybacks to pump up the share price and enrich shareholders, notably himself and his hedge fund.
The Sears story shows how hedge fund operators can thrive even as the underlying company is pillaged. In a decade, 175,000 people at Sears/Kmart lost their jobs and revenue was cut in half. Various pieces of Sears were sold off. Lampert did just fine.
His net worth soared to over $8 billion after he did the Sears deal. In some years, he made over $1 billon just in income. After ballooning by several billion in the years when Sears stock was high-flying, Lampert’s reported net worth is back down to something like $2 billion—below its peak but still astronomical and all based on taking down one of America’s great companies.
Lampert’s hedge fund also became a prime a lender to Sears, making money off of commissions and interest charges as well as being a prime shareholder. Lampert’s core strategy was to enrich himself, even if he ran Sears into the ground. For the most part, the nostalgia coverage of the demise of Sears has missed this.
If you look hard, you can find an excellent 2017 piece from The New York Times, by Julie Creswell, “The Incredible Shrinking Sears,” on Lampert’s role. Another writer who regularly covers how hedge funds and private equity have pillaged American retailing is David Dayen.
The story goes far beyond Sears. Last year, about 20 retail chains went into bankruptcy. In most cases, the culprit was a hedge fund or private-equity owner…
By now, Prospect readers probably know the basic story of the demise of Sears. The company that pioneered the 20th-century version of e-commerce—the catalog—did not succumb to 21st-century innovations like Amazon and Walmart. Rather, it was dismantled piece by piece by Eddie Lampert, the hedge fund titan (and former Yale roommate of Treasury Secretary Steven Mnuchin) who purchased it in 2005. Lampert and his hedge fund engaged in relentless financial engineering to suck out all the value from Sears and leave a desiccated husk, which now could face possible liquidation in bankruptcy.
But just how much did Lampert vacuum out? That’s a surprisingly hard question to answer, if only because of the variety of schemes he employed. Lampert was at one point simultaneously Sears’s CEO, board chairman, transaction partner, landlord, and banker. (Upon the bankruptcy filing, he stepped down as CEO.) Because of his outsized role as Sears’s number-one creditor, he stands to gain in a bankruptcy even if his shares of Sears stock get wiped out. Through this ploy, Lampert has been able to transfer to himself all the salvageable assets of the company. And so far, it’s worked out.
If you look just to Lampert’s compensation as chairman and CEO, you might conclude that he put all his efforts into making Sears a success. Lampert typically took no salary in his roles at Sears, and despite numerous buybacks and other schemes to raise the stock price, he did not engage in any quick-buck stock sales, opting instead to accumulate shares. Currently, Lampert personally holds a 31 percent stake in Sears, and his hedge fund, ESL Investments, holds another 18 percent. That stock has drastically plummeted to near-zero levels, and Lampert has taken a bath.
But it’s important not to overlook Lampert’s other Sears-related revenue streams. First, Lampert has been lending Sears enormous amounts of money. It’s standard practice in a private equity–style play to load up the portfolio company with debt as a means by which the private equity lender can extract the corporate cash flow. It’s decidedly atypical for the CEO himself to be the lender, however. As of now, Lampert’s ESL and a related fund called JPP own roughly $2.66 billion in Sears debt. The cash flow just on the interest on these notes is between $200 million and $225 million per year.
This figure continues to grow—ESL announced on Monday another $300 million debtor-in-possession loan to support operations through the end of the year….