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Circle of Competence Issue #43

Quote of the week: "Not all those who wander are lost." - J.R.R. Tolkien

FOOD FOR THOUGHT

Eddie Lampert

Back in Issue #34 I discussed the slow, painful demise of Sears and Eddie Lampert's fight to save (or suck the life out of?) Sears. I also shared an excellent 2011 short thesis from John Hempton of Bronte Capital

that discussed the incredibly haughty assumption of Lampert that he could actually pull off the feat of liquidating an operating business with many tens of thousands of employees and keep the profits from the tangible property for his fund.

The more I study business and finance, the more I realize that investing and running businesses are akin to an intricate dance. They have rhythms, cadences, actions, and reactions. They are not theoretical complexes that can easily be modeled on paper. Rather, they are living, breathing organisms that grow, plateau, decline, and ultimately die.

And so it has been with Sears.

When Lampert came into the picture in 2005 with the KMart merger, there was little doubt that, as Hempton writes above, Sears was an awful retailer. But the property values looked so darn juicy for the price paid. And now with Sears in bankruptcy proceedings, Lampert is working hard to save his equity position in the property with a last ditch effort to restructure the debt and keep the value of the Sears property from falling into other creditors' hands. By one account, Lampert may have even made a tidy profit while presiding over the desecration of Sears:

"As a result of such dealings — which include five major asset sales and 15 financings — ESL hasn’t lost the entire $1.5 billion it invested in Sears and Kmart equity. Including the gains and losses on the major spin-offs, dividends, and interest income, it appears that loss was narrowed to about $624 million. Adding back the $2 billion in gains from hedge fund fees would give Lampert a net profit of approximately $1.38 billion. And that’s not even counting the uncertain value of his $2.6 billion in Sears debt, with its liens on Sears real estate, among other items."

Where did Lampert misstep? In my opinion, Hempton hit it square on the nose - Lampert made