Murray Stahl from Horizon Kinetics Q4 letter to investors.
It can take weeks or even months to qualify a security or sector for purchase in our portfolios. Recently, it required not so many days, perhaps a Horizon Kinetics record, and it couldn’t have been done without the assistance of the press. This is the article that caught my eye some weeks ago. Note the decisive, emotive terminology. From the headline itself: “Sears Canada…In Bid to Survive”, and from the 2nd sentence in its own standalone paragraph: “…lightens its ballast in a bid to stay afloat.”
At the time, I was familiar with Sears Canada mainly in the context of its parent company Sears Holdings, rather than having evaluated it as a standalone investment. I did not have the impression that financial distress was one of the company’s failings. Here is the analysis, which required very little in the way of special training—no ‘deep dive’ here, no databases or Excel spreadsheets. The October 29th article reported that the company agreed to surrender the leases at five of its full?line department stores to the landlords, in exchange for which the company received a payment of $400 million. These are not stores that Sears owned, mind you; they were leased, which is usually shown on the balance sheet as an obligation. But these leases probably had decades before they expired, and apparently the landlords were willing to pay substantially to control those properties again. At the time, the entire stock market value of Sears Canada was only $1,450 million, so surrendering those five leases provided cash equal to over one?quarter of the company’s market value. Moreover, the company still had 111 additional full?line stores remaining as well as over 300 smaller?format stores and other assets.
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Well, looking at some older articles, it seems that several months earlier Sears Canada had done the same thing: in June it agreed to vacate two stores, for which the landlords paid the company $191 million, and the landlords have an option to have the company vacate a third store within five years for an additional $53 million. And the prior year, the company did the same, receiving $170 million for vacating three stores. If you try this yourself, you’ll see that this part of the analysis doesn’t require much effort.
See Full PDF here: Q4 2013 Commentary