Sears Ups the Ante for Restoration Hardware

Nov 28, 2007 2:07 AM  By

The Sears-Restoration Hardware saga took another turn this week. Sears Holdings Corp. announced on Nov. 26 it is prepared to offer $269 million for the home furnishings company. A day later Restoration Hardware agreed to provide Sears the confidential information it requested — if Sears agrees to execute a customary confidentiality and standstill agreement on terms similar to those other parties have agreed to.

Sears plans to offer $6.75 a share in cash for the cataloger/retailer, a significantly higher offer than the $4 a share bid it had submitted in late October. After that initial Sears bid, Restoration Hardware on Nov. 8 agreed to accept a $267 million offer — $6.70 a share — led by an affiliate of private-equity firm Catterton Partners. But as part of the deal, the independent members of Restoration Hardware’s board of directors agreed to solicit alternative proposals for the company for a 35-day period that ends Dec. 13.

Hoffman Estates, IL-based Sears Holdings Corp., the parent company of retailers Sears and Kmart, then bought a 13.7% stake in the home decor merchant: It paid $30.2 million for 5.3 million shares of Restoration Hardware, according to a Nov. 19 Securities and Exchange Commission filing.

Corte Madera, CA-based Restoration Hardware operates about 100 stores, plus its catalogs and Website. For the fiscal second quarter ended Aug. 4, the company reported a loss of $7.9 million, or 20 cents a share. Sears shares closed Nov. 26 at $107.77; Restoration Hardware shares closed Monday at $7.07.

Sears spokesman Christian Brathwaite declined comment; representatives of Restoration Hardware and Catterton Partners did not return calls.

What do industry insiders make of the Sears/Restoration Hardware deal? Stuart Rose, managing director for Wellesley, MA-based investment bank Tully & Holland, doesn’t think Sears and Restoration Hardware belong together. “Restoration Hardware is an upscale brand, with price points far away from Sears,” Rose explains. “It has a defined look, which doesn’t match well with the rest of the Sears look.”

That is if Sears is thinking of buying Restoration Hardware for an in-store brand like Land’s End, Rose says. “It might be just a financial play for a third division in the Sears/Kmart world, in which case, I would say stick to your knitting and make Kmart and Sears the power houses they once were before trying to fix a third brand.”

But Lee Helman, managing director with New York-based investment bank Financo, thinks Restoration would be an interesting fit for Sears “if it is seeking to leverage the Lands’ End direct-to-consumer platform and customer base.

Lands’ End has the management depth to complement the Restoration Hardware team, “and there could be ample back-end opportunities for synergies,” Helman says.

Chris Shannon, managing director for New York-based investment bank Berkery, Noyes & Co., agrees with Helman. “Sears’ potential acquisition of Restoration Hardware is a good move and goes along with [Sears CEO Edward] Lampert’s strategy,” he says. “First, to do much needed cost cuts to establish a base and then to look for high-end retailers to bolt-on to further upgrade the Sears/Kmart image.”