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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (50909)	2/14/2013 9:59:45 PM
From: AFed	2 Recommendations Respond to of 78958

The Preferred (OSHSP) is senior to the Common (OSH). Many people have no understanding why it exists since it's non-convertible, bears no dividend, and is callable at a little over $4/sh. The truth rests deep in the SEC filings and the history of the deal between Ares, Sears, and OSH back in 2006. These contracts are all undisclosed given how immaterial it is to SHLD's broader financials (from my explorations anyways), but here's what I pieced together: In an effort to squeeze the blood out of the rock that is Sears, Eddie negotiated for a levered recap of OSH: OSH would incur $405m of debt + Ares would buy 20% of the equity for $60m = $465m of cash would be upstreamed to SHLD which could then be invested elsewhere. As some may remember, SHLD was supposed to be the next Berkshire so this was a great strategy, so the story goes ;) For tax purposes, SHLD would keep the other 80% equity for 3 years, and then Ares would buy the remaining 80% at the end of 2008. Since they couldn't explicitly have a "plan" to sell lest the IRS get on their case, SHLD and Ares negotiated a put/call arrangement. Well, when late 2008 rolled around, the last thing anybody wanted to do is sink more equity into an underperforming California hardware store, so Ares reneged on the deal. In turn, SHLD said "OK Ares, but we're putting you underneath $20m (face value) of Preferred so that you get $0 before we get this $20m paid off." Fast forward 5 years, OSH performance hasn't been great, but this $20m is still out there and it's senior to the Common but Junior to the debt. Since Ares and SHLD have been using 6x EBITDA to value this biz, it's probably a zero in a bankruptcy situation. The only reason why I recommend it over the Common is that if Eddie wants to teach Ares a lesson, he'll potentially do it through a rights offering via the Preferred whereby Ares gets diluted to practically 0%. One word of caution on Samana -- they are simply a Ziff Brothers' hedge fund (ZBI). They used to own closer to 10%, so they've been selling. I suspect they see the same thing I do ("love the story, but the leverage is just too high and coming due at the wrong time of the cycle"). Please tell me more on Kmart -- my only knowledge on the situation was that Eddie restructured it out of Chapter 11 then merged it into SHLD. Were you in the pre-BK equity? If so, I can understand why you'd be cautious (I've seen controlling shareholders / creditors do terrible things to minority shareholders too many times to count... I apparently learn my lessons too slowly because it keeps happening to me).