Sears Holdings - Different Opinions Make A Market, But The Facts Can Make You A Fortune (OTCMKTS - SHLDQ) - Seeking Alpha

12/22/2020 Sears Holdings: Different Opinions Make A Market, But The Facts Can Make You A Fortune (OTCMKTS:SHLDQ)
CMKTS:SHLDQ) | Seeking Alpha
Long Ideas | Services
Sears Holdings: Different Opinions Make A Market, But The Facts Can Make
You A Fortune
Jun. 24, 2019 10:04 AM ET481 comments | 13 Likes
by: Eric Moore
Summary
The amended Chapter 11 plan gives no value to the more than 6 Billion in net operating losses and tax
credits.
After the NOLs are valued, the common stockholders will not be wiped out.
Under the asset purchase agreement, the sale of substantially all of their assets to Transform Holdco will
qualify as a tax-reorganization.
The second-lien debt 10/15/2018 bonds will receive at least par.
Senator Elizabeth Warren is dead wrong about Eddie Lampert.
The Sears Holdings (OTCPK:SHLDQ) stock and warrants have declined 98% since I
wrote my first article. The stock was selling for about $16.27 at that time, it is now selling
in the .40 cent range. The opportunity is much greater than it was when that article was
posted.
It is very challenging for short-term traders who sometimes call themselves investors to
hold on to a stock (or buy more) of a stock that has declined in price so much, especially if
they don't buy based on valuation. The assumption is that if the stock were worth more, it
would be selling for more.
In a prior article, I coined the phrase Equilibrium Price Bias. This is when one believes
that the price they pay for a good or service is roughly equal to the value. This bias makes
it very difficult for investors to believe a stock selling for .40 could actually be worth $10,
think about it how often do you buy something of quality at a deeply discounted price?
How I became a Value investor

At an early age, I learned to find quality and value at a discount price by shopping at the
goodwill and thrift stores for rare books (prior to Amazon) and new items donated from
major apartment stores due to a fire or flood, etc. On occasions, I found books worth $75
or more for .50 or less, because of this prior experience, I was trained to look for value
everywhere.
https://seekingalpha.com/article/4271785-sears-holdings-different-opinions-make-market-facts-can-make-you-fortune 1/13
12/22/2020 Sears Holdings: Different Opinions Make A Market, But The Facts Can Make You A Fortune (OTCMKTS:SHLDQ) | Seeking Alpha
In 2010, at a thrift store that normally sold all their suits for $15 or less, I found about 50
New Armani suits for sale for $199 each, the Neiman Marcus tags and bar codes were still
on the suits. I quickly discovered that the suits were worth between $1,700 and $3,000
each (the margin of safety). I immediately called close friends and family and agreed to
sell them the suits I found in their sizes at cost. I gave some of the suits to friends as
Christmas or birthday gifts and I kept 10 suits for myself and sold the balance (about 20
suits at an average of $700 each).
I brought several of these suits to Chicago intending to wear one of them at the SHLD
annual meeting, however, I spent too much time in the hotel lobby talking with hedge fund
investors and individual shareholders so to the chagrin of some people on Seeking Alpha
who saw the picture of me and Eddie Lampert in an article, I was dressed more like Steve
Jobs than my idols, the late Reginald F. Lewis and the legendary actor Philip Michael
Thomas (who played Detective Tubbs on Miami Vice).
Below is a picture of me in Switzerland after a meeting with some large Sears

shareholders wearing one of the $2,500 Armani suits that I bought for $199.99
Before you buy a used car, you can look at the Kelly Blue Book to get an idea of what the
value is; before you buy a house, you can look at the tax value, the appraised value, or
the comps in that neighborhood or general area.
Unfortunately, we don't have a Kelly Blue Book for stocks, and some companies are very
difficult to value, especially the securities of a company in bankruptcy.
The Book: The Phoenix Approach by William J. Grace is a good place to start learning
the basics of investing in distressed and out of favor companies in bankruptcy.
To better understand why I am still a buyer of warrants, stock, and bonds, I have posted
my philosophy on investing which I repeat daily like a mantra:
I will not buy or continue to hold a stock of a company that I can not value, I will not
buy or sell based on popular opinion or who else is buying or selling the stock, I will
invest only when a sustainable margin of safety exists, I will seek out companies that
are still very valuable over time even if the underlying business completely fails, I will
not guess or gamble in stocks, I am an investor. I will constantly seek to understand
how I can be wrong about my valuation thesis. I will only invest in stocks within my
circle of competence but will continue to expand my circle by constant reading,
studying and researching. I am not a fool because I bought a stock that has declined
in price, and I am not a Genius because I bought a stock that has risen in price. I will
always buy based on valuation, not what other market participants think or say.
Sears Holdings is a complex investment and it is not for the faint of heart or for short-term
traders or for investors not willing to invest in hiring the people who do know how to value
SHLDQ.
Also, there has been a lot of discussion in the comment section of my articles regarding
the location and/or value of the Sears Holdings net operating losses and tax credits,
others say the NOLs have no value or that they have already been accounted for in the
"$5.2 Billion" purchase price (even though the NOLs are not listed anywhere in the asset
purchase agreement (Doc 1730 Page 5-13).
This article will address those comments and others including my opinion of the likelihood
of the common stock surviving.
Common stockholders will not be wiped out when the value of the
NOLs are added to the value of the reorganized debtor
According to the Amended Chapter 11 Plan (Doc 3895) proposed by Sears Holdings, the
stockholders will receive no recovery (with the exception of any recovery from the litigation
claims against ESL and others for the Seritage (SRG) and Lands' End (LE) spin-offs) (see
below):
However, the debtor is not the only entity that can file a Chapter 11 plan and shareholders
are not officially wiped out until the bankruptcy court issues an ordering saying so, plans
are simply proposals and they are amended all the time and competing plans can be filed
by other parties, including creditors and shareholders. This is a key point (See Doc 2355-1
Page 747).
The exclusivity period to file a Chapter 11 plan is up on or about June 15, 2019, but an
extension has been filed by SHLD (Doc 4171) seeking to extend that period to exclusively
file a plan until August 12, 2019, and October 14, 2019, to solicit acceptances of that plan.
Furthermore, to qualify for the tax free reorganization cited in the asset purchase
agreement (Doc 1730 Page 22) pursuant to section 382(I)(5), the Newco entity (Transform
Holdco) must consist of at least 50% of the old SHLDQ qualified creditors and pre-change
shareholders (see also Doc 2339 Page 80).
In my first article, I used case studies to make the case that Sears wasn't the first "dying
retailer" that was turned into real estate empire, I cited Alexanders and Two guys. In this
case, I looked for a good example of a company in bankruptcy with uncounted net
operating losses that presented a Chapter 11 Plan that wiped out shareholders but when
the NOLs were counted, the shareholders received a full recovery and remained intact.
Business history is very important.
Case Study: The Coram Health Care Bankruptcy

Coram Healthcare was formed in the 1994 combination of six leading providers of home
drug infusion therapy, these services were offered as an alternative to intravenous drug
treatment at the hospital. The stock traded as high as $26.75 in 1995, but after concern
over how much debt they had, the stock dropped significantly and eventually as low as a
nickel after the bankruptcy filing.
In 1999, prior to the bankruptcy filing, Cerebus Partners LP teamed up with Goldman
Sachs and Foothill Capital Corp and bought $250,000,000 in face value of debt at a huge
discount. After this purchase was made, Cerebus encouraged Coram to hire a turnaround
specialist named David Crowley to advise the current CEO, his salary was roughly
$1,000,000 annually. Not long afterwards, the CEO was removed and replaced by
Crowley. Unbeknownst to shareholders, Mr. Crowley was still receiving payment from the
note-holders after he became CEO (this was not disclosed to shareholders).
It is clear that Mr. Crowley's appointment as CEO created a fiduciary relationship between
him and the common stockholders, this was all but ignored and it was made clear that Mr.
Crowley was only acting in the best interest of the note-holders (his clients) when he
agreed to pay a large cash interest payment to them when he had the option to pay the
note-holders their interest in kind, therefore, saving much-needed cash for a company that
was clearly headed to bankruptcy and needed to preserve cash (A clear conflict of
interest).
The Shareholder Advocate

Billionaire Sam Zell had purchased roughly 2 Million shares of Coram Healthcare at an
average price of 11 cents, he initially bought 450,000 shares at the suggestion of a close
friend, and after he saw the shady cash payment to the note-holders, he bought another
1,550,000 shares figuring there would be enough value left over for shareholders. Similar
to the First Sears Holdings Chapter 11 Plan, the first Coram bankruptcy proposed a plan
that eliminated the shareholders.
The Trustee and the Equity Committee (Led by Zell) objected to the plan for various
reasons, one of which was that the value of the NOLs was not included in the Coram plan,
they argued that if the NOLs were valued, the shareholders would remain intact and
receive a significant recovery, Coram argued that they did not need to value the NOLs.
However, the court disagreed and said in its ruling:
We agree with the equity committee that the Valuation of the Debtors for purposes of
confirmation must include all assets, even those a buyer may not value. See, In re
New York, New Haven & Hartford R.R. Co., 4 B.R. 758 Under the Trustees Plan, the
Debtors are not being sold to an outside buyer. Instead the note holders are
acquiring the Debtors, Therefore, we must determine what their value is to the note-
holders
The Trustees plan used an appraisal prepared by Deloitte which included the value of the
NOLs as one of the Coram assets, this plan was supported by the equity committee, and
pursuant to that plan, showed that a significant amount of money was available for
shareholders based on the value of the NOLs. This is very relevant to Sears Holdings
because the current plan filed by Sears Holdings does not value the NOLs. The Coram
Court said:
However, we conclude that Deloitte properly included the NOLs since their value is
preserved for Reorganized Coram (and the Note-holders) under the Trustee's Plan.
NOLs are often lost when a company is sold, because there is a change of
ownership of more than 50%. See 26 U.S.C. § 172 (2002). The Internal Revenue
Code has an exception, however, which allows the preservation of NOLs where
ownership is transferred to creditors under a chapter 11 plan. Id. at § 382. Therefore,
although the NOLs have no value to an outside buyer, we agree with the Equity
Committee that they should be considered here because the Trustee's Plan
contemplates their preservation for the benefit of Reorganized Coram (and the Note-
holders).
Sam Zell and the equity holders prevailed, they received a full recovery, more than a 30x
return for Sam Zell and a "$56,000,000 distribution" to settle the conflict of interest claims
filed against David Crowley and others.
The Amended Chapter 11 Plan does not value the NOLs

The most valuable asset of Sears Holdings is missing from the valuation, several Seeking
Alpha contributors and readers have mocked me in the comment sections of articles
alleging that the net operating losses are worth zero. Just because they have not been
valued in the current plan does not mean that a 382(I)(5)(B) disclosure will not be filed by
Transform Holdco outlining the claims that will result in at least a 1% interest in the new
SHLD stock and the cancellation of debt ("COD") etc. (and essentially disclosing their
value).
The ruling in Coram Healthcare proves that when NOLs are preserved, the value
must be disclosed as part of the value of the debtors' assets.
We know by the disclosure in the amended Chapter 11 plan (Doc 3895 page 97) that no
50% ownership change has occurred; therefore, the NOLs have been preserved and they
have significant value as disclosed very early in the bankruptcy case. It may seem
counter-intuitive that "losses" could be valuable but they are; Document 20 filed on the
first day of the bankruptcy reads:
The debtors possess Tax Attributes, including tax basis in assets exceeding the
value of such assets and, as of the Commencement date, estimated NOL's in
excess of $5 Billion and tax credits of approximately $900 million The tax Attributes
are valuable assets"
The NOLs technically have no value to the Sears shell as they don't have an operating
business to use them, See Textron, 418 F. Supp. at 47 (noting that NOLs are worthless
unless the taxpayer has income to offset). However, SHLDQ has disclosed multiple times
that they expect the NOLs to be preserved via a tax reorganization and transferred to
Transform Holdco. Therefore, the NOLs must be valued.
In the amended plan (Doc 3895 on page 108), it reads in part:
The Debtors estimate that, as of the commencement Date, the SHC Tax Group had
consolidated net operating losses ("NOL's") of approximately $6 billion, among other
tax attributes (including tax basis in assets) However, in accordance with the Asset
Purchase Agreement, a substantial portion of such NOLs and certain other tax
attributes are expected to be transferred to Transform as a result of the Sale
transaction (in combination with a subsequent liquidation of the Debtors) qualifying
as one or more reorganizations for U.S. federal income tax purposes, subject to
reduction with respect to any item of cancellation of debt ("COD") incurred by such
debtors in the taxable year of the Sale Transaction or afterwards. The Debtors
expect to incur certain additional losses in connection with implementation of the
Plan
According to the court filings on February 1, 2019, at least $4 Billion of debt should be
cancelled; when this happens, SHLDQ is left with:
1) An enterprise value of $1.5 Billion (net of working capital)
2) $1 Billion in consolidated NOLs plus full-year 2018 losses
3) $900 Million in consolidated tax credits
4) $1.8 Billion in tax basis in assets (in excess of value)
See Doc 2355-1 below:
The Structure of the Potential Sears Tax Reorganization
In the above-proposed tax reorganization structure, Lenders 1 and 2 loan money to

Newco in exchange for preferred and common stock and warrants in Transform Holdco.
The interesting thing is the loans are not considered debt for valuation purposes but are
considered a contribution of capital (see IRS Ruling Letter 201025018 and see this paper
entitled Tax attributes in Bankruptcy).
I believe Lender 1 will be ESL and Lender 2 will be Cyrus Investments as they own the
majority of the SHLDQ debt (see below from Doc 3276 pg 188).
If some or all of the Cyrus Investment and ESL investment debt is contributed to capital,
there will be significant value for common stockholders (I believe the second-lien debt is
worth par already and those parties will easily prevail in the litigation over the diminution in
value of the collateral). Also, their Newco preferred securities have already been
distributed to Sears Holdings to be paid to all second-lien debt holders (not just the ESL
parties) (See Doc 3895 Page 100). Ironically, the thing that is most likely to save
shareholders from being wiped out is the years and years of losses that many complained
about.
Conclusion
Ultimately, the valuation of the reorganized debtor will be based on the value of the
remaining NOLs, after the cancellation of debt ("COD"), and the value of Transform
Holdco after the loans from Lender 1 & 2 are made (also don't forget the 600 leases of the
closed stores and any potential settlement proceeds from the Seritage and Lands' End
Spin-off litigation).
The creditor claims will be likely be paid in Newco stock, Newco preferred stock and
warrants and cash; new Sears (Transform Holdco) will be a cash cow based on the New
Sears Business plan.
I welcome all comments and questions as long as they are on the topic and respectful. My
hope is that this article raising the level of discussion beyond that of Eddie Lampert is
Gordon Gecko and the net operating losses have zero value. This article proves the NOLs
have significant value and that SHLDQ is intending the asset purchase transaction to
qualify as a tax reorganization. Therefore, the focus should be on how to value the
securities based upon the potential outcomes of the tax reorganization. I will wait until my
next article to publish my value for the common stock and warrants.
By the way, the allegations against Eddie Lampert from Senator Elizabeth Warren and
others are false and irrelevant and/or politically motivated. It is important to ignore the side
noise and focus on valuation of the SHLDQ shell to Transform Holdco. With the exception
of Lauren Thomas of CNBC, most financial media demonizes Eddie Lampert and anything
Sears related. Lauren Hirsch another good writer from CNBC posted Mr. Lampert's
response to Senator Warren's letter here.
I have posted a few more relevant documents on bankruptcy tax law here for those
interested in reading further. Also a look at Doc 2355-1 Page 740-762 for detailed
information on the NOLs and how they can be potentially valued or acquired by ESL in a
Chapter 11 plan, page 747 discloses potential Chapter 11 examples, some of which I
wrote about earlier.
Disclosure: I am/we are long SHLDQ, SRG. I wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose
stock is mentioned in this article.
Eric Moore's ratings on SHLDQ
Latest rating: Very Bullish Very Bullish Bullish Neutral Bearish Very Bearish
0.35
0.3
0.25
0.2
0.15
0.1
Jan '20 Apr '20 Jul '20 Oct '20
All Ratings by Eric Moore »
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Sears Holdings - Different Opinions Make A Market, But The Facts Can Make You A Fortune (OTCMKTS - SHLDQ) - Seeking Alpha

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12/22/2020 Sears Holdings: Different Opinions Make A Market, But The Facts Can Make You A Fortune (OTCMKTS:SHLDQ)

CMKTS:SHLDQ) | Seeking Alpha

Long Ideas | Services

The second-lien debt 10/15/2018 bonds will receive at least par.

Senator Elizabeth Warren is dead wrong about Eddie Lampert.

How I became a Value investor

Below is a picture of me in Switzerland after a meeting with some large Sears

Case Study: The Coram Health Care Bankruptcy

The Shareholder Advocate

The Amended Chapter 11 Plan does not value the NOLs

In the amended plan (Doc 3895 on page 108), it reads in part:

1) An enterprise value of $1.5 Billion (net of working capital)

2) $1 Billion in consolidated NOLs plus full-year 2018 losses

3) $900 Million in consolidated tax credits

4) $1.8 Billion in tax basis in assets (in excess of value)

See Doc 2355-1 below:

The Structure of the Potential Sears Tax Reorganization

In the above-proposed tax reorganization structure, Lenders 1 and 2 loan money to

Eric Moore's ratings on SHLDQ

All Ratings by Eric Moore »

More articles by Eric Moore

SHLDQ articles from SA PRO

Seritage Growth ends master lease at 12 Sears stores Thu, Jun 4

More financing for Sears as losses continue Fri, Feb 21

'Old' Sears settles differences with 'new' Sears Tue, Jan 14

The Death Of Sears Fri, Dec 13

Sears to close 96 stores by February Fri, Nov 8

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