Restoration in sight for Sears?

HOFFMAN ESTATES, ILL. —The move by Restoration Hardware’s board of directors in late November to ask Sears Holdings—and by extension its boss Edward Lampert—to sign a confidentiality and standstill agreement is a tried tactic that can be avoided easily by someone ready to pony up money for enough stock. And Lampert controlled almost enough shares to get his way, even as the Restoration Hardware board played its card. The only real question in the circumstances is: What will Lampert do with Restoration Hardware if he gets it?

On Nov. 23, Sears asked Restoration Hardware for information pursuant to a merger—with a $6.75 a share price tag proposed as the price for execution—and proposed a confidentiality agreement that offered the acquirer an out, if it provided a higher price. On Nov. 27, the Independent Committee of Restoration Hardware’s board told Sears it would provide requested confidential information if Sears would agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties interested in acquiring the home furnishings retailer.

By then, Sears owned about 5.3 million Restoration Hardware shares, or about 14% of the company’s outstanding stock—just a little less than the proportion Ron Burkle had when he took control of Pathmark and Wild Oats.

The Sears move trumped acquisition efforts by Catterton Partners, a private-equity firm that has been working with Restoration Hardware chairman and ceo Gary Friedman and the retailer’s management on a friendly buyout. Catterton had an offer in, but Lampert initially upped it by a nickel, and Wall Street sent the share price up over even the Sears Holdings offer, figuring that Lampert could—and would—raise the stakes again. Thereafter, Restoration Hardware’s share price broke $7 for the first time since spring.

Restoration Hardware’s board suggested some hostility to Lampert’s tactics in its response to the Sears request for information. Ray Hemmig, chairman of the Independent Committee, said, “We are flattered that [Sears] is interested in learning more about our company. We welcome its participation in the process, along with the other interested parties. However, the committee is firmly committed to a fair process that will yield the best results for all stockholders and believes that process is best served through all parties agreeing to the proposed standstill terms, without preferential treatment of one party over another.” Of course, if Sears signs the agreements, it has to abide by Restoration Hardware’s terms, and Lampert would be precluded from turning his bid for the company hostile. Or more hostile.

What Lampert will do with the company when, and if—and a determined Lampert usually precludes the if—he gets it, is another matter. Sears doesn’t have a great history going up-market on the home side and tends to lose interest in ancillary formats launched, at least in the United States. On the other hand, Sears is desperate for an identity for its home business, and Ty Pennington apparently isn’t supplying it.

Restoration Hardware isn’t exactly prime stuff. The company, which focuses on retro home furnishings, hasn’t enjoyed any stretch of prolonged success over the past five years when its shares have bumped between $10 and $2 each, and were approaching the bottom again before acquisition looked possible.

The positioning of the two chains may create some merchandising overlap if, for example, they could play up a traditional angle putting Restoration Hardware home furnishings with Kenmore appliances. Michael Blackburn, an analyst for Real Consumption, said he was among those uncertain about the merchandising synergies inherent in an acquisition of Restoration Hardware, but speculated, “Maybe they could pair it with Land’s End.”

Merchandising aside, Lampert is likely looking at synergies on the cost side, which would include tweaking the Restoration Hardware format for more economic efficiency and riding whatever dividend investors might provide, a strategy that he has put in play before.

Even as the acquisition drama was playing out, Sears found itself locked in a little tragedy. It reported net income of $2 million, or 1 cent per diluted share, for the third quarter ended Nov. 3, versus $196 million, or $1.27 per diluted share, for the year-earlier period, which included a $64 million after tax, or 42 cents per diluted share, onetime benefit. Total revenues for the latest period declined $400 million to $11.5 billion versus the year-earlier quarter. Domestic comparable-store sales declined 4.6%, with Sears stores off 4.2% and Kmart down 5%.

“We are very disappointed in our performance for the third quarter. We cannot blame our results entirely on the retail and macroeconomic environments. We have much on which to improve and are working hard to do so,” said Aylwin Lewis, Sears president and ceo.