By Jessica DiNapoli and Mike Spector
NEW YORK (Reuters) - Sears Holdings Corp (PK:SHLDQ) will ask a bankruptcy judge on Tuesday if it can proceed with liquidation after it could not reach an agreement on Chairman Edward Lampert's $4.4 billion takeover bid, casting doubt on the survival of the 126-year-old U.S. department store chain, people familiar with the matter said.
Should Sears liquidate its assets, it would become one of the most high-profile victim in the wave of bankruptcies that has swept the retail sector in the last few years, as the popularity of online shopping exacerbates the fierce price competition facing brick-and-mortar stores.
Sears, which filed for bankruptcy protection last October, may have to close hundreds of stores it is still operating, potentially putting up to 68,000 people out of work, the sources said. Its vast inventories of tools, appliances and store fixtures will be sold in fire sales, the sources added.
Lawyers for Lampert and his hedge fund, ESL Investments Inc, also plan to present details of his offer and make the case for renewing efforts to save Sears in bankruptcy court on Tuesday, the sources said.
U.S. Bankruptcy Judge Robert Drain in the Southern (NYSE:SO) District of New York, who is presiding over the case, could decide to give Lampert more time to improve on his bid, the sources said. A bankruptcy auction for Sears' assets is not due until Jan. 14.
The sources asked not to be identified because the matter is confidential. Representatives for Sears and Lampert offered no immediate comment.
Sears will now plan for a separate February auction of its assets and real estate, some of the sources said. Lampert, who also made a back-up offer for some of the assets as part of his initial $4.4 billion (£3.4 billion) proposal, will make another bid, the sources added.
A main point of contention in the negotiations between Lampert and Sears centred on whether Lampert's bid fully addressed the bankruptcy costs that Sears has racked up, some of the sources said.
The costs, which include bills from lawyers and financial advisers, are expected to exceed $200 million, those sources said.
Lampert's bid proposed forgiving $1.3 billion of debt he holds in exchange for ownership of the reconstituted Sears, a bankruptcy manoeuvre known as a credit bid.
In addition, Lampert wanted a release from legal exposure related to a series of transactions he completed with the retailer before it filed for bankruptcy protection. Those made him the company's biggest creditor, in addition to its largest shareholder.
Lampert's offer did not include putting up cash to back the credit bid. That raised concerns in the negotiations since the manoeuvre might not be allowed in court, the sources said, given ongoing investigations of Lampert's pre-bankruptcy deals, which the hedge fund manager maintains were proper.
Unsecured creditors have pushed for Sears to liquidate, partially because they contend they will realise a better financial recovery if it does. Those creditors, which include Sears landlords and bondholders, have also questioned Lampert's pre-bankruptcy transactions with the retailer.
ICONIC RETAILER LOST ITS SHINE
The liquidation of Sears, which includes discount chain Kmart, would follow a decade of revenue declines, hundreds of store closures, and years of deals by billionaire Lampert in an attempt to turn around the company he put together in 2005 through an $11 billion deal.
Sears dates back to the late 1880s and its mail-order catalogues with merchandise from toys, medicine, gramophones, automobiles, kit houses and tombstones made it the Amazon.com Inc (NASDAQ:AMZN) of its time.
The iconic retailer gradually lost its shine, however, as consumers turned to e-commerce and brick-and-mortar rivals such as Walmart Inc (N:WMT) and Target Corp (N:TGT).
Lampert had pledged to restore Sears to its glory days, when it owned the tallest building in the world as well as a radio station and Allstate (NYSE:ALL) insurance.
But critics say Lampert let the stores deteriorate over the years, even as he bought the company's stock and lent it money.
The largest U.S. toy retailer, Toys ‘R’ Us, tried to emerge from its 2017 bankruptcy filing but was also forced to liquidate six months later, after creditors lost confidence in its turnaround plan.