Sears Holdings Corporation’s previously announced the rights offering of Sears Canada Inc. (“Sears Canada”) common shares expires today, November 7, 2014. We announced in the estimated third quarter 2014 update we released in our Form 8-K filing this morning that, as the close of business yesterday, we have sold a total of 31,578,464 common shares of Sears Canada, realizing gross proceeds of approximately $300 million (including about $30 million in transit). Below is some background information on rights offerings in general and the Sears Canada rights offering in particular.
What is a Rights Offering?
In a rights offering, a corporation grants its existing shareholders the right to subscribe to securities at a fixed price. These rights represent short-term options granted by the corporation that the shareholder has the ability to exercise. Many rights offerings grant existing shareholders the right to acquire additional securities of the corporation issuing the rights. Others, like our 2012 rights offering for shares of Sears Hometown and Outlet Stores, Inc. and our recent rights offering for shares of Sears Canada Inc., give shareholders the ability to subscribe for securities of a subsidiary corporation. Rights offerings are more common in Europe but are a well-established tool for selling equity and also debt in the United States as well.
Why Did We Sell Sears Canada Shares Using a Rights Offering?
In May 2014, we engaged Merrill, Lynch, Pierce, Fenner & Smith Incorporated to assist us in exploring strategic alternatives for our interest in Sears Canada, including a sale of the interest or of Sears Canada as a whole. At the conclusion of that process, we decided that a negotiated third party transaction on the terms that would likely be available to us would not be at an attractive price and would have significant risks and uncertainties. After examining other transaction structures to monetize our interest in Sears Canada, including a secondary offering, our board of directors approved the rights offering of Sears Canada shares.
The biggest advantage of a rights offerings compared to a private sale or an underwritten public offering is that it allows all shareholders to participate on a pro rata basis. Put simply, no shareholder is advantaged versus another. The Sears Canada rights offering enabled all of our shareholders to participate in the future growth and performance of Sears Canada. The rights we distributed were tradeable on the NASDAQ Stock Market, so our shareholders who did not intend to buy Sears Canada stock could monetize the value of their rights by selling. We even worked with Sears Canada to get their common shares listed on the NASDAQ, which was a condition to making the rights tradeable. And unlike an underwritten offering, there are no fees or commissions payable to an underwriter or investment bank, which means more of the proceeds stay with us.
Rights offerings are especially useful when, as in our situation, there is a large shareholder that historically exercises its full, pro rata allocation of subscription rights. ESL Partners, L.P. and Edward S. Lampert., our Chairman and CEO (together, “ESL”), told us when we launched the Sears Canada rights offering that they intended to exercise their pro rata portion of the subscription rights in full as soon as possible after the distribution of subscription rights. As a result, right after we launched the Sears Canada rights offering on October 16, 2014, we sold approximately 17.7 million Sears Canada common shares to ESL for approximately $168.5 million in proceeds, ensuring the success of the offering. After ESL’s initial participation, many other shareholders have exercised their rights, and we have sold an additional 13.9 million shares of Sears Canada. The ability to realize substantial cash proceeds in this manner was one of the factors our board of directors took into account when deciding whether to approve the Sears Canada rights offering.
Yesterday, a Canadian columnist suggested that we opted for a rights offering to enable ESL to avoid the Canadian “take-over bid” regime. That’s simply incorrect. The take-over bid rules govern certain public offers to acquire shares of a Canadian company in the market if the acquiror would end up owning 20% or more of the company’s shares. But there’s no exemption for rights offerings. Instead, the take-over bid regime provides an exemption to acquires shares from no more than five separate sellers at a price no higher than a 15% premium to the average close price over the 20 days preceding the purchase. ESL acquired its shares from one seller—us—at a price that was below the 15% premium. As a result, the take-over bid regime simply didn’t apply to ESL’s participation in the offering. Had ESL bought the shares from us directly without paying a premium, or bought them in an underwritten secondary offering, it would have used this same exemption.
The same columnist also suggested that the rights offering allowed ESL to buy a controlling position in Sears Canada without a premium and with minimum process. That’s not true either. ESL publicly stated that it didn’t intend to acquire a majority of Sears Canada’s shares through the rights offering. It’s also important to keep in mind that the rights offering was reviewed and considered by: (1) our board of directors, (2) the board of directors of Sears Canada and (3) a special committee of the Sears Canada board comprised of independent directors. Each of us had our own advisers. Our board met with our legal advisors before approving the rights offering and determined that it was in the best interests of Sears Holdings and its stockholders. Sears Canada’s board of directors, together with its advisors and the Sears Canada special committee and its independent legal and financial advisors, also reviewed the terms of the rights offering and agreed to cooperate with us to enable the rights offering to go forward.
Note: The foregoing shall not constitute an offer to sell or a solicitation of an offer to buy any securities, nor shall there be any offer, solicitation or sale of any securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification of the securities under the securities laws of such state or jurisdiction.
Rob Schriesheim is Executive Vice President and Chief Financial Officer for Sears Holdings.