Sears Moves to Spin Off Orchard Hardware, With Lampert Controlling That Too (SHLD)

Sears Holdings Corporation (NASDAQ: SHLD) is shrinking its empire, sort of.  The company is spinning off its Orchard Supply Hardware Stores Corporation holdings to its shareholders.  Sears holds effectively all of the Common Stock and Preferred Stock, but at the time of the spin-off the Class A Common Stock will represent approximately 80% of the general voting power of outstanding capital stock and the Preferred Stock will represent 100% of the outstanding non-voting capital stock.

Some may call this part of a turnaround, some may call it a special situation.  The reality is that Orchard is too small to make much of a difference when you consider the Sears and KMart empire.

Sears will distribute all of the outstanding shares of Class A Common Stock and Preferred Stock on a pro rata basis to holders of Sears Holdings common stock; terms will be set ahead and will be made in book-entry form. As with many spin-off situations, fractional shares will not be distributed and the distribution agent will aggregate fractional shares into whole shares, it will then sell the whole shares in the open market, and will finally distribute the net cash from proceeds from the sales pro rata to each holder.

Orchard Supply Hardware is a California specialty retailer focused on the consumer segment of the home improvement market and its stores are designed to appeal to convenience-oriented customers. As of April 30, 2011, it operated 89 full-service hardware stores in California and it has opened four new stores in California within the past three years.  Stores average about 40,600 square feet of interior and exterior selling space and carry a broad assortment of repair and maintenance, lawn and garden and in-home products.

The company was originally formed as a purchasing cooperative by a group of farmers in California’s Santa Clara Valley. It opened for business in March 1931 with a single store in San Jose, California, it was incorporated in Delaware back in 1989, and was ultimately acquired by Sears Roebuck back in 1996.

This will be an Eddie Lampert controlled entity after the spin-off as Lampert’s ESL owns about 61% of Sears.  ESL Investments, Inc. and affiliated entities currently owns approximately 61% of Sears Holdings common stock and the group will own approximately 61% of Orchard’s Class A Common Stock (and voting power) and will own about 49% of the general voting power of the outstanding capital stock.

This is too small of an event to create a major move in Sears other than that it is one more move to try to get Sears focused on its own operations.  The full Orchard filing can be found here.

JON C. OGG