UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14C

 

 

Information Statement Pursuant to Section 14(c) of the

Securities Exchange Act of 1934

 

 

 

Check the appropriate box:
☐		Preliminary Information Statement
☐		Confidential, for Use of the Commission Only (as permitted by Rule 14C-5(d)(2))
☒		Definitive Information Statement

SEARS HOMETOWN AND OUTLET STORES, INC.

(Name of Registrant as Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):
☐		No fee required.
☐		Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
		(1)		Title of each class of securities to which transaction applies:
		(2)		Aggregate number of securities to which transaction applies:
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		(4)		Proposed maximum aggregate value of transaction:
		(5)		Total fee paid:
☒		Fee paid previously with preliminary materials.
☐		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount Previously Paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing Party:
		(4)		Date Filed:

 

 

 

SEARS HOMETOWN AND OUTLET STORES, INC.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

NOTICE OF ACTION BY WRITTEN CONSENT AND APPRAISAL RIGHTS

AND

INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED

NOT TO SEND US A PROXY.

September 13, 2019

Dear Stockholders:

This notice of action by written consent and appraisal rights and the accompanying information statement are being furnished to the holders of common stock of Sears Hometown and Outlet Stores, Inc., a Delaware corporation (the “Company”), in connection with the Agreement and Plan of Merger, dated as of June 1, 2019 (the “Merger Agreement”), among the Company, Transform Holdco LLC, a Delaware limited liability company (“Transform”), and Transform Merger Corporation, a Delaware corporation (“Merger Subsidiary”), pursuant to which Merger Subsidiary will merge with and into the Company (the “Merger”). A copy of the Merger Agreement is attached as Annex A to the accompanying information statement.

Prior to completion of the Merger, the Company has been afforded an opportunity to market and sell the Company’s Sears Outlet and Buddy’s Home Furnishing Stores businesses to a third party (an “Outlet Sale”). On August 27, 2019, the Company entered into an Equity and Asset Purchase Agreement (the “Liberty Purchase Agreement”) with Franchise Group Newco S, LLC (the “Outlet Purchaser”) and, solely for purposes of a performance and payment guarantee on behalf of the Outlet Purchaser, Liberty Tax, Inc., to effect an Outlet Sale to the Outlet Purchaser (the “Liberty Sale”). A copy of the Liberty Purchase Agreement is attached as Annex B to the accompanying information statement.

If the Merger is completed, each share of common stock, par value $0.01, of the Company (“Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by ESL Investments, Inc. or its investment affiliates, including Edward S. Lampert (together, “ESL”), or Transform, or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”) for such shares) will be cancelled and converted automatically into the right to receive $2.25 in cash, without interest, subject to an upward adjustment (as described in more detail in the accompanying information statement) in the event that the Liberty Sale is completed prior to the closing of the Merger (the “Merger Consideration”). If the Liberty Sale is consummated prior to the closing of the Merger, the Merger Consideration is currently estimated to be approximately $3.25 per share of Common Stock, although such amount could be lower under certain circumstances, as described more fully in the accompanying information statement. Any payment of the Merger Consideration will be subject to any required withholding taxes.

Concurrently with the execution of the Merger Agreement, the Company entered into a letter agreement with Edward S. Lampert (the “ESL Letter Agreement”), pursuant to which Edward S. Lampert has agreed, among other things, not to, and to cause ESL not to, effect any amendment of the Company’s bylaws or take any other stockholder action that is inconsistent with the terms of the Merger Agreement or that would reasonably be expected to frustrate the transactions contemplated thereby, any Outlet Sale conducted in accordance with the terms of the Merger Agreement, or the sale process related thereto. A copy of the ESL Letter Agreement is attached as Annex C to the accompanying information statement.

The Company’s board of directors (the “Board of Directors”) duly established and authorized a special committee of the Board of Directors (the “Special Committee”) currently composed of one independent and disinterested member of the Board of Directors to review, consider, evaluate, negotiate, reject or recommend or not recommend to the Board of Directors a potential negotiated transaction involving the Company and Transform, or any alternative potential transactions. On May 31, 2019, the Special Committee (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved the Merger Agreement and the transactions contemplated thereby and declared the Merger Agreement advisable and (iii) recommended that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company. Thereafter, at a meeting of the Board of Directors convened to act on the Special Committee’s recommendations, the Board of Directors unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii) directed that the Merger Agreement be submitted to the stockholders of the Company for their adoption and approval and (iv) recommended that the Merger Agreement be adopted by the stockholders of the Company.

Under Section 251 of the DGCL and the applicable provisions of the Company’s Certificate of Incorporation (as amended) and Amended and Restated Bylaws, the adoption of the Merger Agreement by the Company’s stockholders required the affirmative vote or written consent of the holders of a majority of the outstanding shares of Common Stock. On June 1, 2019, immediately following execution of the Merger Agreement, Edward S. Lampert and his investment affiliate ESL Partners, L.P. (together, the “Principal Stockholders”) caused to be delivered to the Company an irrevocable written consent (the “Written Consent”) adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a sale of substantially all of the Company’s property and assets and be subject to the stockholder approval requirements of Section 271(a) of the DGCL (a “Section 271 Sale”), in respect of 13,226,598 shares of Common Stock, representing approximately 58.3% of the outstanding shares of Common Stock entitled to act by written consent with respect to the adoption of the Merger Agreement and any Outlet Sale. A copy of the Written Consent is attached as Annex D to the accompanying information statement

In connection with the Company’s entry into the Liberty Purchase Agreement, the Principal Stockholders executed and delivered to the Company an irrevocable written consent (the “Liberty Consent”) confirming the Principal Stockholders’ approval of an Outlet Sale consummated in all material respects in accordance with the terms set forth in the Liberty Purchase Agreement, to the extent such sale constitutes a Section 271 Sale, in respect of 12,535,679 shares of Common Stock, representing approximately 55.2% of the outstanding shares of Common Stock entitled to act by written consent with respect to the adoption of the Liberty Sale. A copy of the Liberty Consent is attached as Annex E to the accompanying information statement.

Accordingly, the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, and any Outlet Sale became effective on June 1, 2019, and the approval of the Liberty Sale specifically was confirmed on August 27, 2019. No further approval of the stockholders of the Company is required to adopt or approve the Merger Agreement or the transactions contemplated thereby, including the Merger, or the Liberty Sale. As a result, the Company has not solicited and will not be soliciting your vote for the adoption or approval of the Merger Agreement or the transactions contemplated thereby, including the Merger, or the Liberty Sale, and does not intend to call a meeting of stockholders for the purpose of voting on the adoption of the Merger Agreement or the transactions contemplated thereby, including the Merger, or the Liberty Sale.

This notice of action by written consent and appraisal rights and the accompanying information statement constitute notice to you from the Company of the Principal Stockholders’ action by written consent to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and the Liberty Sale to the extent the Liberty Sale would constitute a Section 271 Sale.

Under Section 262 of the DGCL, if the Merger is completed, subject to compliance with the requirements of Section 262 of the DGCL, holders of shares of Common Stock (other than the Principal Stockholders) will have the right to demand an appraisal for, and be paid the “fair value” of, their shares of Common Stock as determined by the Court of Chancery of the State of Delaware instead of receiving the per share Merger Consideration if the Merger is completed, but only if they strictly comply with the procedures and requirements set forth under Section 262 of the DGCL. In order to exercise your appraisal rights, you must submit a written demand for an appraisal of your shares no later than 20 days after the date of mailing of this notice and the accompanying information statement, or October 3, 2019, and precisely comply with other procedures set forth under Section 262 of the DGCL, which are summarized in the accompanying information statement. A copy of Section 262 of the DGCL is also attached as Annex H to the accompanying information statement.

This notice and the accompanying information statement constitute notice to you from the Company of the availability of appraisal rights under Section 262 of the DGCL and of action by written consent pursuant to Section 228(e) of the DGCL.

The information statement accompanying this notice provides you with more specific information concerning the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. We urge you to read the entire accompanying information statement carefully. Please do not send in your shares of Common Stock at this time. If the Merger is completed, you will receive instructions regarding the surrender of and payment for your shares of Common Stock.

By order of the Board of Directors,

 

 

Charles J. Hansen

Vice President, General Counsel and Secretary

Neither the Securities and Exchange Commission nor any state securities or other regulatory agency has approved or disapproved of the transactions described in this document, including the Merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

The information statement is dated September 13, 2019, and is first being mailed to stockholders on or about September 13, 2019.

SEARS HOMETOWN AND OUTLET STORES, INC.

5500 Trillium Boulevard, Suite 501

Hoffman Estates, Illinois 60192

INFORMATION STATEMENT

Table of Contents

 

SUMMARY TERM SHEET			1
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE LIBERTY SALE			14
SPECIAL FACTORS			19
Background of the Transaction			19
Recommendation of the Special Committee and Reasons for Recommendation			40
Recommendation of the Board of Directors and Reasons for Recommendation			44
Opinion of PJ Solomon			45
Position of the Company on the Fairness of the Merger			55
Unaudited Projected Financial Information of the Company			56
Position of ESL on the Fairness of the Merger			60
Purposes and Reasons of the Company in Connection With the Merger			63
Purposes and Reasons of the ESL Filing Parties in Connection With the Merger			64
Plans for the Company in Connection with the Merger			65
Alternatives to the Merger			65
Relationships and Transactions with Related Persons			66
Record Dates			68
Certain Effects of the Merger			68
Source and Amount of Funds			69
Interests of Directors and Executive Officers in the Merger			70
Material U.S. Federal Income Tax Consequences of the Merger			76
Regulatory Approvals			79
De-listing and De-registration of Company Common Stock			80
Fees and Expenses			80
Anticipated Accounting Treatment of the Merger			80
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			81
PARTIES INVOLVED IN THE MERGER			83
Sears Hometown and Outlet Stores, Inc.			83
Transform Holdco LLC			83
Transform Merger Corporation			83
THE MERGER AGREEMENT			84
Explanatory Note Regarding the Merger Agreement			84
The Merger			84
Merger Consideration			84

 

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Certificate of Incorporation; Bylaws; Directors and Officers			87
Closing and Effective Time of the Merger			87
Effect of the Merger on Company Common Stock			87
Payment Procedures			88
Treatment of the Company’s Equity Awards and Other Incentive Compensation			89
Appraisal Rights			90
Representations and Warranties; Material Adverse Effect			91
Conduct of Business Pending the Merger			93
Other Covenants and Agreements			95
Conditions to the Merger			105
Termination; Effect of Termination			106
Specific Performance			107
Amendment; Extension; Waivers			107
Expenses			108
Governing Law; Jurisdiction			108
IMPORTANT ADDITIONAL INFORMATION REGARDING THE COMPANY			109
About the Company and its Business			109
Directors and Executive Officers			109
Market Prices and Dividend Data			111
Security Ownership of Certain Beneficial Owners and Management			111
Historical Consolidated Financial Information			113
Prior Public Offerings; Prior Stock Purchases			114
IMPORTANT ADDITIONAL INFORMATION REGARDING THE ESL FILING PARTIES			115
APPRAISAL RIGHTS			118
HOUSEHOLDING			123
FUTURE STOCKHOLDER PROPOSALS			124
WHERE YOU CAN FIND ADDITIONAL INFORMATION			125

Annexes

 

Annex A—Merger Agreement			A-1
Annex B—Liberty Purchase Agreement			B-1
Annex C—ESL Letter Agreement			C-1
Annex D—Written Consent			D-1
Annex E—Liberty Consent			E-1
Annex F—Liberty Sale Letter Agreement			F-1
Annex G—PJ Solomon Opinion			G-1
Annex H—Section 262 of the General Corporation Law of the State of Delaware			H-1

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE LIBERTY SALE

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger Agreement, the Merger and the Liberty Sale. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the additional information contained elsewhere in this information statement, the annexes to this information statement and the documents referred to in this information statement.

 

Q.	WHY DID I RECEIVE THIS INFORMATION STATEMENT?

 

A.

On June 1, 2019, the Company, Transform and Merger Subsidiary entered into the Merger Agreement, and immediately thereafter the Principal Stockholders adopted the Merger Agreement and approved the Merger and the other transactions contemplated by the Merger Agreement, as well as any Outlet Sale to the extent such Outlet Sale would constitute a Section 271 Sale. Later, on August 27, 2019, the Company, the Outlet Purchaser and, solely for purposes of a performance and payment guarantee on behalf of the Outlet Purchaser, Liberty, entered into the Liberty Purchase Agreement to effect the Liberty Sale and the Principal Stockholders approved the Liberty Sale to the extent that such sale would constitute a Section 271 Sale.

Applicable provisions of the DGCL and certain securities regulations require us to provide you with information regarding the Merger and the Liberty Sale, even though your vote or consent is neither required nor requested to adopt the Merger Agreement or complete the Merger or the Liberty Sale. We are not asking you for a proxy and you are requested not to send us a proxy.

 

Q.	WHAT IS THE PROPOSED TRANSACTION?

 

A.

The proposed transaction is the acquisition by Transform of all shares of Company Common Stock not owned by ESL or Transform, by the Company as treasury stock or by any subsidiary of either the Company or Transform. The proposed transaction will be effected through a merger of Merger Subsidiary, a wholly owned subsidiary of Transform, with and into the Company, with the Company continuing as the surviving corporation. If the Merger is completed, the Company will become wholly owned by Transform and ESL and the Company Common Stock will cease to be listed on NASDAQ, will be de-registered with the SEC and will no longer be publicly traded.

In addition, prior to completion of the Merger, the Company has been afforded an opportunity to market and sell the Outlet Segment to a third party and has entered into the Liberty Purchase Agreement with the Outlet Purchaser and, solely for purposes of a performance and payment guarantee on behalf of the Outlet Purchaser, Liberty, to effect the Liberty Sale. In the event that the Liberty Sale is completed prior to the closing of the Merger, the amount of consideration paid for your shares of Company Common Stock in the Merger will be increased if the Liberty Sale results in Net Proceeds in excess of $97,500,000.

 

Q.	IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE FOR MY SHARES OF COMPANY COMMON STOCK?

 

A.

If the Merger is completed, each share of Company Common Stock that is issued and outstanding (except for shares (i) owned by the Company as treasury stock or by any subsidiary of either the Company or Transform, (ii) owned by Transform or ESL or (iii) held by stockholders who are entitled to demand and who properly demand appraisal under Section 262 of the DGCL for such shares) will be converted into the right to receive the Merger Consideration, consisting of the Base Merger Consideration of $2.25 in cash per share, without interest, subject to an upward adjustment (as described in more detail below) in the event that a sale of the Outlet Segment that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger. As a result of the Merger, upon the surrender of your shares of Company Common Stock, you will receive a total amount of cash equal to the product obtained by multiplying the Merger Consideration by the number of shares of Company Common Stock that you own, unless you properly exercise and do not withdraw or fail to perfect appraisal rights as provided under Section 262 of the DGCL.

 

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Q.	IS THE MERGER CONSIDERATION SUBJECT TO AN INCREASE?

 

A.

Yes, if the Liberty Sale is completed prior to the closing of the Merger. The Base Merger Consideration is $2.25 in cash per share, without interest. However, the Base Merger Consideration will be increased if the Liberty Sale is completed prior to the closing of the Merger and such Liberty Sale results in Net Proceeds in excess of $97,500,000. In that case, the Base Merger Consideration will be increased by an amount equal to the quotient of (i) the excess of the Net Proceeds over $97,500,000 divided by (ii) the sum of the aggregate number of shares of Company Common Stock and unvested Company restricted stock units issued and outstanding as of the closing date of the Merger. If completed, the Liberty Sale is currently estimated to result in Net Proceeds to the Company of approximately $121,000,000 and, pursuant to the Merger Agreement, a corresponding increase in the Base Merger Consideration of approximately $1.00 per share of Company Common Stock (being the quotient of (i) $121,000,000 minus $97,500,000, divided by (ii) the sum of 22,702,132 shares of Company Common Stock and 781,618 shares of restricted stock units expected to be issued and outstanding as of the closing date of the Merger), resulting in Merger Consideration of approximately $3.25 per share of Company Common Stock. The actual adjustment, if any, to the Base Merger Consideration is subject to the occurrence of the consummation of the Liberty Sale and to the actual amount of Net Proceeds received by the Company from such sale as calculated in accordance with the Merger Agreement, which may be lower than the current estimate of approximately $121,000,000 as a result of any downward working capital adjustment to the Liberty Purchase Price or if the Company’s actual Liberty Sale Costs together with the actual Merger Costs exceed the Cap. Under no circumstances can the Liberty Sale result in Net Proceeds of more than $121,000,000 or Merger Consideration of more than $3.25 per share of Company Common Stock. See the section entitled “The Merger Agreement—Merger Consideration” beginning on page 84 of this information statement.

 

Q.	DID THE BOARD OF DIRECTORS APPROVE THE MERGER AND THE MERGER AGREEMENT?

 

A.

Yes. After careful consideration and evaluation of the Merger, and in consideration of, among other things, the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the opinion of PJ Solomon that, based upon and subject to the factors and assumptions set forth in such opinion, the Merger Consideration to be paid to holders of Company Common Stock pursuant to the Merger Agreement is fair, from a financial point of view, to the holders of shares of Company Common Stock (other than ESL or Transform), our Board of Directors approved and declared advisable the Merger Agreement and the Merger. To review our Board of Directors’ reasons for recommending and approving the Merger and the Merger Agreement, see the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 40 of this information statement and “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 44 of this information statement.

 

Q.	DID THE BOARD OF DIRECTORS APPROVE THE LIBERTY SALE AND THE LIBERTY PURCHASE AGREEMENT?

 

A.

After careful consideration and evaluation of the Merger Agreement and the transactions contemplated thereby, including a potential Outlet Sale complying with the requirements set forth therein, and in consideration of, among other things, the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement, our Board of Directors adopted a resolution recommending, in accordance with the provisions of the Company’s amended and restated bylaws, a potential Outlet Sale complying with the requirements set forth in the Merger Agreement. The Board of Directors then also specifically approved the Liberty Sale and the Liberty Purchase Agreement prior to its execution by the Company in consideration of, among other things, the recommendation of the Special Committee that the Board of Directors adopt resolutions approving the Liberty Sale and the Liberty Purchase Agreement.

 

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Q.	IS THE APPROVAL OF STOCKHOLDERS NECESSARY TO ADOPT OR APPROVE THE MERGER AGREEMENT, THE MERGER OR THE LIBERTY SALE? WHY AM I NOT BEING ASKED TO VOTE ON THE MERGER AGREEMENT, THE MERGER OR THE LIBERTY SALE?

 

A.

The Merger requires the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Company Common Stock and, to the extent the Liberty Sale constitutes a Section 271 Sale, the Liberty Sale would require adoption by the holders of a majority of the outstanding shares of Company Common Stock under Section 271(a) of the DGCL. The requisite stockholder approvals were obtained on June 1, 2019 and August 27, 2019, the respective dates on which the Principal Stockholders caused to be delivered to the Company (i) an irrevocable written consent, in respect of approximately 58.3% of our outstanding Company Common Stock, adopting and approving the Merger Agreement and the transactions contemplated thereby, including the Merger, and approving any Outlet Sale to the extent such Outlet Sale would constitute a Section 271 Sale, and (ii) an irrevocable written consent, in respect of approximately 55.2% of our outstanding Company Common Stock, confirming the Principal Stockholders’ approval of an Outlet Sale consummated in all material respects in accordance with the terms set forth in the Liberty Purchase Agreement, to the extent such Outlet Sale would constitute a Section 271 Sale. Therefore, your vote is not required and is not being sought. We are not asking you for a proxy and you are requested not to send us a proxy.

 

Q.	ARE THERE ANY REQUIREMENTS FOR THE LIBERTY SALE?

 

A.

Yes. Under the Merger Agreement, any Outlet Purchase Agreement the Company enters into must include certain terms, including that the Net Proceeds of the Outlet Sale must be at least $97,500,000, the buyer of the Outlet Segment must assume all obligations and liabilities primarily arising out of or relating to the Outlet Segment, consideration for the Outlet Sale must be payable to the Company exclusively in cash at the closing of the Outlet Sale, and the Outlet Purchase Agreement must generally be terminable by the Company without any further liability or obligation from and after the Outlet Closing Deadline. Concurrently with the execution of the Liberty Purchase Agreement, the Company, Transform and Merger Subsidiary agreed in the Liberty Sale Letter Agreement that the Liberty Purchase Agreement, and any Outlet Sale consummated in accordance with and on the terms set forth in the Liberty Purchase Agreement, shall be deemed for all purposes under the Merger Agreement to satisfy and comply with the requirements in the Merger Agreement that any Outlet Purchase Agreement and any Outlet Sale comply with the terms set forth in Annex III of the Merger Agreement and otherwise be on commercially reasonable terms. See the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 97 of this information statement.

 

Q.	IS THE MERGER SUBJECT TO THE FULFILLMENT OF CERTAIN CONDITIONS?

 

A.

Yes. Before completion of the Merger, the Company, Transform and Merger Subsidiary must fulfill or waive several closing conditions. If these conditions are not satisfied or waived, the Merger will not be completed. See the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page 105 of this information statement.

 

Q.	AM I ENTITLED TO APPRAISAL RIGHTS?

 

A.

Yes. Under the DGCL, stockholders who did not provide a consent to the adoption of the Merger Agreement (i.e., stockholders other than the Principal Stockholders) are entitled to appraisal rights in connection with the Merger with respect to their shares, so long as they precisely follow specific procedures to exercise their rights under the DGCL. See the section entitled “Appraisal Rights” beginning on page 118 of this information statement.

 

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Q.	WHEN IS THE MERGER EXPECTED TO BE COMPLETED?

 

A.

We expect the Merger to be completed in October 2019, subject to satisfaction of the closing conditions set forth in the Merger Agreement; however, there can be no assurance that the Merger will be completed at that time, or at all. Pursuant to the Liberty Sale Letter Agreement, the Company, Transform and Merger Subsidiary have agreed, among other things, that the Merger will, subject to satisfaction of certain conditions, close substantially concurrently with the closing of the Liberty Sale. Pursuant to the terms of the Liberty Purchase Agreement and the Liberty Sale Letter Agreement, the closing of the Merger will not occur prior to October 11, 2019. In addition, pursuant to the Liberty Sale Letter Agreement, the Merger Closing Extension Right allows Transform to defer the closing of the Merger by up to 7 business days upon written notice to the Company, in which case the Company must exercise its right under the Liberty Purchase Agreement to defer the closing of the Liberty Sale by the same number of business days.

 

Q.	WHEN WILL THE LIBERTY SALE BE COMPLETED?

Pursuant to the terms of the Liberty Purchase Agreement, the closing of the Liberty Sale will not occur prior to October 11, 2019. In addition, if Transform exercises its Merger Closing Extension Right to defer the closing of the Merger by up to 7 business days, the Company must, pursuant to the terms of the Liberty Sale Letter Agreement, exercise its right under the Liberty Purchase Agreement to defer the closing of the Liberty Sale by the same number of business days. The Liberty Sale must be completed, if at all, by October 23, 2019. However, that deadline may be extended in certain circumstances, including by up to 7 business days in connection with Transform’s exercise of the Merger Closing Extension Right, and also, if certain conditions are met, by the Company by up to 15 additional days upon written notice to Transform certifying that (i) the Company and the Outlet Purchaser are working diligently and in good faith to consummate the Liberty Sale and (ii) the Company and the Outlet Purchaser have a reasonable expectation of doing so within such 15-day period. See the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 97 of this information statement.

 

Q.	WHAT HAPPENS IF THE MERGER IS NOT COMPLETED?

 

A.	If the Merger is not completed for any reason, stockholders will not receive any payment for their shares of Company Common Stock in connection with the Merger. Instead, the Company will remain a publicly traded company, and shares of Company Common Stock will continue to trade on NASDAQ.

 

Q.	WHAT HAPPENS IF THE LIBERTY SALE IS NOT COMPLETED?

 

A.	If the Liberty Sale is not completed, the Merger Consideration will equal the Base Merger Consideration and the Outlet Segment will continue to be owned and operated by the Company following the closing of the Merger.

 

Q.	SHOULD I SURRENDER MY SHARES OF COMPANY COMMON STOCK NOW?

 

A.	No. After the Merger is completed, you will be sent detailed instructions for exchanging your shares of Company Common Stock for the Merger Consideration.

 

Q.	WILL I OWE TAXES AS A RESULT OF THE MERGER?

 

A.

The Merger will be a taxable transaction for U.S. holders of Company Common Stock. As a result, assuming you are a U.S. holder, any gain you recognize as a result of the Merger will be subject to U.S. federal income tax and also may be taxed under applicable state, local or other tax laws. In general, you will recognize gain or loss equal to the difference between (1) the Merger Consideration you receive and (2) the adjusted tax basis of the shares of Company Common Stock you surrender in the Merger. Assuming you are

 

17

a non-U.S. holder, your exchange of shares of Company Common Stock for the Merger Consideration generally will not result in U.S. federal income tax unless you have certain connections with the United States. See the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 76 of this information statement for a more detailed explanation of the tax consequences of the Merger. You should consult your tax advisor on how specific tax consequences of the Merger apply to you.

 

Q.	WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANY?

 

A.

We file periodic reports and other information with the U.S. Securities and Exchange Commission (the “SEC”). Some of these reports are incorporated by reference into this information statement. You may read and copy this information at the SEC’s public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available on the internet site maintained by the SEC at www.sec.gov. For a more detailed description of the information available, please refer to the section entitled “Where You Can Find Additional Information” beginning on page 125 of this information statement.

 

Q.	WHO CAN HELP ANSWER MY QUESTIONS?

 

A.	If you have questions about the Merger after reading this information statement, please call the Office of the General Counsel, Sears Outlet and Hometown Stores, Inc., at (847) 286-7000.

 

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SPECIAL FACTORS

The following section, together with the sections entitled “Summary Term Sheet”, “Questions and Answers about the Merger and the Liberty Sale”, “Cautionary Statements Regarding Forward-Looking Statements”, “Parties Involved in the Merger”, “The Merger Agreement”, “Important Additional Information Regarding the Company”, “Important Additional Information Regarding the ESL Filing Parties”, “Appraisal Rights”, “Householding”, “Future Stockholder Proposals” and “Where You Can Find Additional Information” constitutes a description of certain aspects of the Merger as required by applicable SEC regulations. Such description, however, may not contain all of the information that is important to you. We encourage you to read carefully this entire information statement, including the Merger Agreement attached as Annex A, for a more complete understanding of the Merger. You may obtain additional information without charge by following the instructions in the section entitled “Where You Can Find Additional Information” beginning on page 125 of this information statement.

Background of the Transaction

Since 2012, ESL has been the controlling stockholder of the Company and the largest holder of outstanding shares of common stock of Sears Holdings Corporation. ESL is also the controlling member of Transform. The Company has significant business relationships with Transform as a result of the February 2019 acquisition by Transform of most of the operating assets of Sears Holdings Corporation and its subsidiaries (together, the “Sears Holdings Companies”) in connection with the voluntary petitions filed in the United States Bankruptcy Court for the Southern District of New York in October 2018 by the Sears Holdings Companies seeking relief under Chapter 11 of Title 11 of the United States Code (the “SHC Bankruptcy Proceedings”). As part of this acquisition, various agreements (the “Separation Agreements”) between the Company, and its subsidiaries, on the one hand, and the Sears Holdings Companies, on the other hand, including agreements under which the Sears Holdings Companies provided the Company and its subsidiaries with merchandise and services, were assigned by the Sears Holdings Companies to, and assumed by, Transform. The Separation Agreements were originally entered into in connection with the Company’s 2012 separation from the Sears Holdings Companies. The Company and Transform regularly engage in commercial discussions related to matters arising under the Separation Agreements.

In November 2016, the Board of Directors established the Special Committee and delegated to it the exclusive power and authority to evaluate and determine a course of action with respect to certain matters that may arise from time to time involving ESL and the Sears Holdings Companies. Upon its formation, the Special Committee consisted of David Robbins and Kevin Longino, both of whom were independent and disinterested with respect to matters involving ESL and the Sears Holdings Companies. The Special Committee was formed in light of the open market purchases of Company Common Stock that had recently been made by ESL, the Company’s consideration at the time of a potential stock repurchase program, as well as the Board of Directors’ concern that the Sears Holdings Companies might engage in a financial restructuring or file for bankruptcy.

In December 2016, the Special Committee engaged PJ Solomon to provide it with certain financial advice and to perform valuation work. The Special Committee held four meetings between November 15, 2016 and January 6, 2017. At an in-person meeting of the Special Committee held on January 6, 2017, at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling LLP (“Shearman & Sterling”), counsel to the Special Committee, were present at the invitation of the Special Committee, representatives of PJ Solomon reviewed a preliminary financial analysis of the Company and alternative courses of action that were available to it, and members of Company senior management discussed the financial performance and position of the Company. During the meeting a potential transaction involving the acquisition of the Sears Home Services business from the Sears Holdings Companies was also discussed. The Company evaluated this potential transaction at the request of Mr. Lampert and engaged in related preliminary discussions with the Sears Holdings Companies, but did not ultimately pursue the potential transaction.

In early October 2018, Mr. Lampert contacted Will Powell, the Chief Executive Officer and President of the Company and a member of the Board of Directors, regarding the possibility of the Company operating, on behalf

 

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of ESL, certain Sears stores then operated by the Sears Holdings Companies, in the event that ESL were to acquire those stores. Mr. Powell and E.J. Bird, Chief Financial Officer of the Company and a member of the Board of Directors, engaged in preliminary discussions with Mr. Lampert on this topic and, at the request of Mr. Lampert, provided a preliminary estimate of the costs of the Company providing these operational services.

The SHC Bankruptcy Proceedings were commenced on October 15, 2018. From their commencement through Transform’s February 2019 acquisition of most of the operating assets of the Sears Holdings Companies, Company senior management, the Board of Directors and the Special Committee regularly monitored developments in the SHC Bankruptcy Proceedings and engaged in contingency planning, including with the Company’s lenders, for potential outcomes of those proceedings.

At a special meeting of the Board of Directors held on October 22, 2018, at which members of Company senior management who were not also directors and representatives of Shearman & Sterling were present at the invitation of the Board of Directors, Company senior management reviewed with the Board of Directors an assessment of the most likely outcomes of the SHC Bankruptcy Proceedings. In light of the pendency of these proceedings and that the potential outcomes could involve a transaction with the Company proposed by ESL, the Board of Directors at the meeting confirmed the prior establishment of the Special Committee and established that all matters relating to the SHC Bankruptcy Proceedings were within the power and authority of the Special Committee. The Board of Directors also designated William K. Phelan, then the Chairman of the Board of Directors and who was independent and disinterested with respect to matters involving ESL and the Sears Holdings Companies, to serve on the Special Committee with Mr. Longino and Mr. Robbins.

In early November 2018, Mr. Lampert contacted Mr. Powell to discuss the status of the SHC Bankruptcy Proceedings and to request that the Company senior management consider formulating a proposal for a potential management-led acquisition of the Company for ESL to review and consider funding. Representatives of Shearman & Sterling and Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”), counsel to ESL, also discussed Mr. Lampert’s request. Also in early November 2018, the Special Committee re-engaged PJ Solomon as its financial advisor.

At a meeting of the Special Committee held on November 9, 2018, at which Mr. Powell, Mr. Bird, representatives of PJ Solomon and representatives of Shearman & Sterling were present at the invitation of the Special Committee, Mr. Powell and representatives of Shearman & Sterling described the conversations that had recently occurred with Mr. Lampert and Cleary Gottlieb and the potential advantages and disadvantages of pursuing the potential transaction suggested by Mr. Lampert were discussed. Following this discussion, the Special Committee directed Shearman & Sterling to advise Cleary Gottlieb that Mr. Lampert should communicate directly with Mr. Robbins, then the Chairman of the Special Committee, if Mr. Lampert wished to potentially fund or otherwise pursue a transaction involving the Company, and directed Mr. Powell and Mr. Bird to refrain from devoting further time or attention to Mr. Lampert’s request unless and until Mr. Lampert had communicated to Mr. Robbins a serious intention to evaluate and pursue a potential transaction. Representatives of Shearman & Sterling spoke to representatives of Cleary Gottlieb later that evening and communicated the Special Committee’s directive.

On January 22, 2019, Mr. Lampert contacted Mr. Powell to advise Mr. Powell of the status of Transform’s bid to acquire assets of the Sears Holdings Companies through the SHC Bankruptcy Proceedings and to discuss possible future alternatives for the Company and any assets actually so acquired by Transform. No specific transaction proposals were made by Mr. Lampert during this communication. Mr. Powell notified Mr. Robbins and Mr. Phelan on the following day of his communication from Mr. Lampert and also described the communication at a regular meeting of the Board of Directors held on January 30, 2019.

On March 7, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors were present at the invitation of the Board of Directors. During the meeting, Company senior management updated the Board on recent developments that were adversely affecting

 

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the results of operations and financial condition of the Company’s Hometown Segment. Company senior management also reviewed with the Board of Directors potential courses of action to address these issues, including expense reductions and a liquidation of the Company’s Hometown Segment.

On March 12, 2019, Mr. Powell spoke separately with both Kunal Kamlani, President of ESL Investments, Inc., and Robert Riecker, Chief Financial Officer of Transform, to request that Transform agree to extend the term of certain of the Separation Agreements to February 1, 2023. An agreement between the Company and certain of its subsidiaries, on the one hand, and certain subsidiaries of Transform, on the other hand, memorializing this extension was executed on the same day.

On March 14, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, Company senior management updated the Special Committee on their recent discussions with Mr. Kamlani and Mr. Riecker, and again reviewed the deteriorating financial condition of the Company’s Hometown Segment and noted that management’s likely recommendation would be that the Company liquidate its Hometown Segment unless a transaction involving the Company’s Hometown Segment (a “Hometown Transaction”) on terms acceptable to the Special Committee quickly materialized. In that regard, Company senior management also requested authorization from the Special Committee for Mr. Powell and Mr. Robbins to contact Mr. Lampert to gauge Mr. Lampert’s interest in a potential Hometown Transaction. After a discussion of relevant process considerations, the Special Committee provided its authorization.

On March 20, 2019, Mr. Powell, Mr. Robbins, Mr. Lampert and Mr. Kamlani spoke via telephone and discussed the state of the Company’s Hometown Segment, including the Company’s consideration of the liquidation of the Hometown Segment, a potential Hometown Transaction and potential next steps. Mr. Lampert indicated to Mr. Powell and Mr. Robbins that he would give the matter further consideration and would be back in contact to indicate whether or not he was interested in further exploring a potential Hometown Transaction.

During the weekend of March 23 and 24, 2019, representatives of Shearman & Sterling and Cleary Gottlieb, at the request of Mr. Lampert, discussed potential transaction structures that could be further explored and related process matters. In the course of these discussions, Cleary Gottlieb indicated that Mr. Lampert was likely to prefer a transaction in which ESL or an affiliated entity would acquire all of the outstanding shares of Company Common Stock not owned by ESL (a “Company Transaction”), as opposed to a Hometown Transaction, and that, based on Cleary Gottlieb’s experience in advising Mr. Lampert on other transactions, Mr. Lampert was likely going to believe that the per share consideration to be paid to the Company’s unaffiliated stockholders in a Company Transaction, were such a potential transaction to be explored, should be based on the Company’s current stock price plus a premium customary for acquisition transactions. Cleary Gottlieb also requested that the Company and ESL or an affiliated entity enter into a confidentiality agreement to permit it to receive non-public information that could inform its evaluation of a potential transaction.

On March 25, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, the Special Committee discussed the conversations that had recently occurred between Shearman & Sterling and Cleary Gottlieb, including the request to enter into a confidentiality agreement. After discussing the benefits and risks of entering into a confidentiality agreement with ESL or an affiliated entity, the Special Committee determined that it would be advisable to do so and directed Shearman & Sterling to send a draft confidentiality agreement to Cleary Gottlieb for its review. Representatives of PJ Solomon also updated the Special Committee on the status of its valuation work.

Shearman & Sterling sent Cleary Gottlieb a draft confidentiality agreement on March 26, 2019. Shearman & Sterling and Cleary Gottlieb negotiated and exchanged subsequent drafts between March 27, 2019 and March 29, 2019, the date on which the Company and Transform entered into the confidentiality agreement. Following the entry into the confidentiality agreement and until the Merger Agreement was executed on June 1, 2019, Transform, ESL and their advisors conducted due diligence on the Company and its operations.

 

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On March 27, 2019, the Board of Directors held a regular meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. Company senior management updated the Board of Directors on the status of the Company’s Hometown Segment, the continuing decline of its business and financial condition and the significant risks to the Company and its stockholders that Company management believed existed as a result. Company senior management stated that they had completed their analysis of potential alternative courses of action to address those risks and had concluded that a complete liquidation of the Hometown Segment would be the best alternative for the Company and its stockholders in the absence of a Hometown Transaction on terms approved by the Special Committee, and explained the considerations that Company management had taken into account in reaching that conclusion (including the impact of a liquidation on the Company’s employees and Hometown dealers). Company senior management also reviewed their plan for implementing the liquidation if such transaction could not be achieved, including with respect to transition assistance that would be made available to Hometown dealers.

Representatives of Shearman & Sterling reviewed for the Board of Directors the recent activities of the Special Committee, and the Board of Directors discussed the timing of a potential transaction with ESL or an affiliated entity in light of the status of the Company’s Hometown Segment. Following that discussion, the Board of Directors, including all of the members of the Special Committee, directed Shearman & Sterling to advise Cleary Gottlieb that the interest of the Special Committee and the Board of Directors in entering into a definitive transaction agreement would likely not extend beyond April 15, 2019. The Board of Directors also adopted resolutions more specifically describing the Special Committee’s exclusive power and authority to review, consider, evaluate, negotiate or reject a potential negotiated transaction with Mr. Lampert or his affiliated entities, and to review, consider and evaluate potential alternative transactions.

Later in the day on March 27, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the meeting, Shearman & Sterling reviewed with the Special Committee the status of negotiations with Cleary Gottlieb on the confidentiality agreement, and the Special Committee and its advisors discussed various process considerations in relation to further transaction discussions with ESL and its advisors. The Special Committee also confirmed the direction given to Shearman & Sterling at the earlier Board of Directors meeting to communicate to Cleary Gottlieb the April 15, 2019 deadline, and this communication occurred later on the same day.

On April 1, 2019, Mr. Lampert, Mr. Kamlani, representatives of PJ Solomon, Mr. Powell and Mr. Bird met at the offices of ESL Investments, Inc. to discuss the status of and outlook for the Company’s business. Mr. Powell, Mr. Bird and PJ Solomon reviewed for Mr. Lampert and Mr. Kamlani the significant issues affecting the Company’s Hometown Segment, the alternatives Company management had considered to address those issues and certain pro forma financial projections of the Company prepared by Company management that assumed that a liquidation of the Company’s Hometown Segment would be effected, as more fully described in the section entitled “Unaudited Projected Financial Information of the Company—Summary of the Pre-ESL Bylaw Amendment Projections” beginning on page 58 of this information statement. The meeting participants also discussed the process for further exploring a potential transaction, but did not discuss or exchange potential economic terms.

On April 3, 2019, at the direction of the Special Committee, representatives of PJ Solomon contacted Mr. Lampert to discuss potential valuation ranges of the Company in the context of a Company Transaction. PJ Solomon indicated to Mr. Lampert that it and the Special Committee believed that a per share range of “mid to high single digits” would be appropriate based on the expected financial performance of the Company following a liquidation of the Hometown Segment.

In the afternoon of April 5, 2019, Cleary Gottlieb sent a draft merger agreement in respect of a Company Transaction to Shearman & Sterling. In its transmittal, Cleary Gottlieb noted that the board of directors of Transform would be meeting later in the afternoon to discuss next steps with respect to its evaluation of a

 

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potential transaction involving the Company, that no decision had yet been made about whether the Transform board of directors would or would not make a transaction proposal and that the draft merger agreement, which did not include economic terms, was being provided in the interest of time. The draft merger agreement did not contain a majority-of-the-minority stockholder vote condition.

Later in the afternoon on April 5, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed Shearman & Sterling’s receipt of the draft merger agreement from Cleary Gottlieb and the fact that a transaction proposal from Transform could be received later in the day. Representatives of PJ Solomon updated the Special Committee on the status of valuation analyses it was performing, and representatives of Shearman & Sterling updated the Special Committee on the Company’s progress on securing the lender waivers and amendments under the Company’s credit agreements that would be required if the Company were to elect to proceed to liquidate its Hometown Segment and that would also extend the maturity of the credit agreements.

Also in the afternoon on April 5, 2019, the Transform board of directors met to consider whether to make a transaction proposal to the Company, and the terms of such proposal. The Transform board of directors approved the submission of a proposal and in the evening of April 5, 2019, Cleary Gottlieb, on behalf of Transform, sent the following transaction proposal letter to Shearman & Sterling along with supporting presentation materials:

Transform Holdco LLC

3333 Beverly Road

Hoffman Estates, Illinois 60179

Board of Directors

Sears Hometown and Outlet Stores, Inc.

5500 Trillium Blvd., Suite 501

Hoffman Estates, IL 60192

Members of the Board:

Transform Holdco LLC is pleased to present this proposal to acquire all of the outstanding shares of Sears Hometown and Outlet Stores, Inc. (the “Company”) not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the last five trading days ($1.82) through April 5, 2019.

We believe our proposal, which will provide certain value and liquidity at a considerable premium to the market price, presents a superior outcome for the Company’s stockholders as compared to the uncertain outcomes facing the Company if it continues on its current path as a stand-alone company. In addition to the immediate value provided to the Company’s stockholders, we believe that the transaction would benefit the Company’s other stakeholders, including employees, independent dealers and franchisees and the local communities that rely on them.

We would only intend to proceed with our proposal if it is approved by the full Board of Directors of the Company upon the recommendation of the special committee of independent directors that we understand has been formed to consider any proposal from us. We intend to finance the transaction with cash or loans from ESL and our other members.

Our proposal is non-binding and may be withdrawn at any time and for any or no reason. A binding agreement will only arise upon execution by all parties thereto of a definitive merger agreement.

Due to ESL’s obligations under the federal securities laws, ESL intends to promptly file an amendment to its Schedule 13D, including a copy of this letter, with the Securities and Exchange Commission.

 

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We are prepared to immediately negotiate and finalize definitive agreements to implement our proposal, and look forward to working together to complete this transaction.

 

On April 6, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed Transform’s transaction proposal.

Later in the day on April 6, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. At the request of the Special Committee, Company senior management discussed the supporting presentation materials that had been received the prior evening from Cleary Gottlieb with the Transform transaction proposal letter, as well as the preparations being undertaken by Company management in support of a Hometown Transaction should Mr. Lampert express an interest in pursuing that transaction. The members of Company senior management were then excused from the meeting.

Representatives of Shearman & Sterling reviewed for the Special Committee the proposal received from Transform and possible responses to it. Representatives of PJ Solomon then reviewed its financial analysis, which resulted in a range of implied equity values of $0.00 to $3.36 per share of Company Common Stock when using the last twelve months earnings before interest, taxes, depreciation and amortization, excluding non-recurring items, for the Company and of $5.96 to $9.58 per share of Company Common Stock when using Company senior management’s financial projections for the Company assuming a Hometown liquidation were to occur, as more fully described in the section entitled “Unaudited Projected Financial Information of the Company—Summary of the Pre-ESL Bylaw Amendment Projections” beginning on page 58 of this information statement. The Special Committee further discussed with its advisors Transform’s proposal and potential responses and alternatives to it, including a liquidation of the Company’s Hometown Segment. Following this discussion, the Special Committee directed Shearman & Sterling to communicate to Cleary Gottlieb that the Special Committee had reviewed Transform’s proposal and concluded that a transaction on the proposed terms would not be in the best interests of the Company’s unaffiliated stockholders.

Shearman & Sterling did so on April 7, 2019. Over the course of that day Shearman & Sterling and Cleary Gottlieb engaged in further discussions regarding Transform’s transaction proposal and potential alternative transactions, including a Company Transaction that would include a contingent value right feature, as well as a Hometown Transaction. Shearman & Sterling also indicated that the Board of Directors was considering a liquidation of the Hometown Segment and, in the absence of a negotiated transaction, expected to make a decision on such a liquidation around April 15, 2019. No agreement was reached on the terms of a potential transaction, and on Monday, April 8, 2019, both ESL and the Company made filings with the SEC prior to the commencement of trading on NASDAQ reporting Transform’s April 5, 2019 transaction proposal, the Special Committee’s response to that proposal and that the parties were continuing to discuss potential transactions.

From April 8, 2019 until April 15, 2019, Company management continued their preparations for the possible liquidation of the Hometown Segment, including by negotiating the terms of waivers and amendments under the Company’s credit agreements that would be required from the Company’s lenders to proceed with the liquidation, while the Special Committee and its advisors continued to discuss potential transactions with ESL and Cleary Gottlieb.

On April 9, 2019, the Special Committee held a meeting at which members of Company senior management and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee.

 

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At the meeting, representatives of Shearman & Sterling reviewed with the Special Committee a draft term sheet setting forth potential terms for a Hometown Transaction with Transform that Shearman & Sterling and PJ Solomon had, at the request of the Special Committee, prepared with input from Company management. Representatives of PJ Solomon also reviewed preliminary financial analyses of the potential economics of the transaction, including in comparison to a liquidation of the Company’s Hometown Segment. The Special Committee and its advisors also discussed potential alternatives for further engagement with Mr. Lampert on a potential transaction, and the benefits and risks of those alternatives. Following this discussion, the Special Committee directed Shearman & Sterling to send the draft term sheet, after reflecting certain changes discussed at the meeting, to Cleary Gottlieb, and directed PJ Solomon to contact Mr. Lampert to discuss the term sheet and to restate the Special Committee’s views on valuation of the Company in the context of a Company Transaction. Shearman & Sterling sent the draft term sheet for the Hometown Transaction (which contemplated a purchase price equal to 76.58% of the book value of transferred Hometown Segment inventory), and representatives of PJ Solomon had this discussion with Mr. Lampert, later on the same day.

On April 10, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon, Shearman & Sterling and Richards, Layton & Finger, P.A. (“Richards Layton”), Delaware counsel to the Company, were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling and PJ Solomon provided the Board of Directors with an update on recent events and discussions with Mr. Lampert and Cleary Gottlieb concerning potential transactions. At the request of the Board of Directors, Shearman & Sterling confirmed that, as previously directed, they had advised Cleary Gottlieb of the expectation that the Board of Directors would make a decision on the liquidation of the Hometown Segment under consideration around April 15, 2019. Representatives of Richards Layton and Shearman & Sterling also discussed with the Board of Directors certain legal issues that could arise in connection with a liquidation of the Company’s Hometown Segment, including whether a stockholder vote would be required.

Company senior management updated the Board of Directors on the status of the Company’s Hometown Segment, the Company’s discussions with its lenders concerning the waivers and amendments under the Company’s credit agreements that would be required to proceed with the potential liquidation of the Hometown Segment and other related preparations that were underway.

During the morning of April 12, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. Also present at the invitation of the Board of Directors were Mr. Lampert, who had requested the opportunity to address the Board of Directors, and representatives of Cleary Gottlieb. Mr. Lampert provided the Board of Directors with an overview of the history of the Company and its relationship with ESL as majority stockholder, noting that ESL had never sought to determine the Company’s strategy or business decisions since its separation from Sears Holdings Corporation. Mr. Lampert acknowledged his understanding that the Board of Directors would likely authorize the liquidation of the Company’s Hometown Segment if the Special Committee and Transform were unable to reach agreement on a negotiated transaction. Mr. Lampert stated that, as the Company’s largest stockholder, ESL did not support a liquidation of the Company’s Hometown Segment, as he believed such action would significantly diminish the Company’s long-term value and viability. He explained that ESL viewed the continued operation of the Company as a public company owning only the Outlet Segment, following a liquidation of the Hometown Segment, to be risky, based on the scale of the Outlet Segment, the cost structure of the remaining company and fluctuations in the operating performance that the Outlet Segment had experienced over its history. Mr. Lampert also discussed the negative impact that a liquidation of the Hometown Segment would have on the Company’s other stakeholders, including owners of Hometown stores and their families, who had supported the Company for more than 25 years, along with their employees and the communities that they served. Other than Mr. Lampert’s general reference to potentially increasing the consideration contemplated by Transform’s April 5, 2019 transaction proposal by including a contingent value right feature for stockholders unaffiliated with ESL, the meeting participants did not discuss or exchange potential economic terms.

 

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Immediately after the conclusion of that meeting of the Board of Directors, a meeting of the Special Committee was held at which Mr. Lampert and representatives of PJ Solomon, Shearman & Sterling and Cleary Gottlieb were present at the invitation of the Special Committee. Mr. Lampert discussed his views on the Company’s Hometown Segment and the terms of the Hometown Transaction that the Special Committee had proposed in the draft term sheet of April 9, 2019, and stated that, notwithstanding Transform’s preference for a Company Transaction, Transform could be prepared to consider a Hometown Transaction for consideration based on 62.5% of the book value of transferred inventory. Mr. Lampert also explained that Transform’s proposal for a Company Transaction was based on his view that the recent improvement in the Outlet Segment’s operating performance was not likely to be sustained. He noted, however, that Transform might be prepared to pay more if this performance were sustained, by supplementing the consideration contemplated by its April 5, 2019 Company Transaction proposal to include a contingent value right feature that would pay out $0.75 per share of Company Common Stock to each unaffiliated Company stockholder if the Company’s Outlet Segment achieved or exceeded $30 million in 2019 Adjusted EBITDA. The Special Committee and Mr. Lampert then engaged in a discussion on the outlook for the Company’s Outlet Segment and appropriate valuations for the Company and its Hometown Segment.

During the afternoon of April 12, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the remarks Mr. Lampert had made earlier in the day to the Board of Directors and the Special Committee, including with respect to his expressed concerns regarding the risks and uncertainty to the Company of operating on the basis of only its Outlet Segment in the event of a sale of the Hometown Segment to Transform. The Special Committee and its advisors also discussed potential responses to Transform, including in light of the Special Committee’s understanding that Transform desired a specific counterproposal to its April 5, 2019 Company Transaction proposal and of the uncertainty involved with the contingent value right feature Mr. Lampert had discussed. Following this discussion, the Special Committee directed PJ Solomon to contact Mr. Lampert and again describe the valuation ranges for the Company that the Special Committee viewed as appropriate in the context of a Company Transaction (the high end of that range being approximately $9.50 per share of Company Common Stock). The Special Committee also directed PJ Solomon to convey to Mr. Lampert that the Special Committee did not view the potential inclusion of a contingent value right feature in a Company Transaction positively and that PJ Solomon would soon be in a position to further discuss a Hometown Transaction after completing its analysis of the potential terms for a Hometown Transaction Mr. Lampert had discussed earlier in the day.

Representatives of PJ Solomon and Mr. Lampert subsequently spoke in the evening of April 12, 2019. Also that evening, representatives of Shearman & Sterling and Cleary Gottlieb discussed the potential structure of a Hometown Transaction.

Representatives of PJ Solomon and Mr. Lampert spoke on April 13, 2019 to continue their discussion from the prior evening. During their conversation they again exchanged views on the appropriate valuation of the Company in the context of a Company Transaction. PJ Solomon also reiterated the Special Committee’s prior economic proposal for a Hometown Transaction, noting that transacting at a lower valuation would be very difficult for the Company due to the debt level and liquidity requirements of its lenders. Mr. Lampert rejected the Special Committee’s economic proposal for a Hometown Transaction and also again stated that ESL did not believe that a liquidation of the Company’s Hometown Segment would be in the best interests of the Company or its stockholders.

On April 14, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon updated the Special Committee on the discussions that had occurred on April 12 and 13, 2019 with Mr. Lampert, and the Special Committee and its advisors discussed potential responses or actions ESL could have or take in light of Mr. Lampert’s most recent conversations with PJ Solomon and in light of Mr. Lampert’s knowledge that the Board of Directors was likely to approve the liquidation of the Company’s Hometown Segment the following day in the absence of a negotiated transaction with Transform.

 

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During the morning of April 15, 2019, ESL acted by written consent of stockholders (the “ESL Action”) to remove Mr. Phelan and Mr. Robbins as directors of the Company, and to appoint Alberto Franco and John E. Tober to the Board of Directors to fill the vacancies created by the removal of Mr. Phelan and Mr. Robbins.

ESL also amended the Company’s Amended and Restated Bylaws pursuant to the ESL Action (the “ESL Bylaw Amendment”) to, among other things, provide for specified approval and procedural requirements that must be met prior to the Company effecting the closure of 20% or more of the stores operating any line of business of the Company or a liquidation, sale or disposal of Company assets representing 20% or more of the consolidated assets of the Company and its subsidiaries, other than in the ordinary course of business, or a line of business of the Company representing 20% or more of the consolidated net sales or net income of the Company and its subsidiaries (each a “Liquidation Action”). Under the ESL Bylaw Amendment, prior to commencing a Liquidation Action the Board of Directors must adopt at a meeting a resolution recommending such Liquidation Action with the affirmative vote of at least 90% of directors then in office. Following the adoption of such a resolution, the Company must make a public announcement of such recommendation and the Board of Directors must then approve such Liquidation Action by an affirmative vote of no less than 90% of directors then in office at a second meeting at least thirty business days following the first meeting.

In connection with the ESL Action, ESL issued the following letter to the stockholders of the Company and the following letter to the Board of Directors:

ESL Investments, Inc.

1170 Kane Concourse

Bay Harbor Islands, FL 33154

April 15, 2019

To: Stockholders of Sears Hometown and Outlet Stores, Inc.

Fellow Stockholders:

As you know, on April 5, 2019, Transform Holdco LLC (“Transform”) sent a non-binding proposal to the Board of Directors (the “Board”) of Sears Hometown and Outlet Stores, Inc. (the “Company”) to acquire all of the outstanding shares of the Company not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the previous five trading days ($1.82) through April 5, 2019 (the “Proposal”).

Transform provided the Company with the Proposal after the Company had communicated to ESL that, absent a transaction, the Board was likely to determine to liquidate the Company’s Hometown segment (the “Hometown Business”). ESL owns approximately 58% of the Company’s outstanding stock and strongly disagrees with any decision by the Board to liquidate the Hometown Business. We believe any such decision would significantly diminish the Company’s value and create significant risk should the Outlet segment’s recent one-year profit performance prove ephemeral.

Any decision to liquidate the Hometown Business would also negatively affect many of the Company’s other stakeholders, including the many Hometown owners and their families, who have supported the Company for more than 25 years, along with their employees and the communities that they serve. Transform emphasized that these owners have a vested interest in seeing the Hometown business remain operating and that, as a new owner, Transform would make investments, including subsidies in the short term, to preserve the network of Hometown Stores and encourage these long time owners to continue to operate their businesses.

Despite Transform’s engagement with the Board and its special committee, the parties were unable to reach agreement on terms for a negotiated transaction. The special committee proposed a price of $9.50 per share, and

 

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we were informed that unless agreement was reached on a transaction by today, it was expected that the Board would vote to liquidate the Hometown Business by this afternoon.

As we strongly disagreed with this decision and saw no hope of Transform reaching agreement with the special committee on a transaction given its unrealistic proposal, we decided today to replace two of the directors with individuals that we hope, together with the remaining directors, will listen to the views of the Company’s stockholders and consider additional paths forward for the Company. We removed William K. Phelan and David B. Robbins and replaced them with the following individuals:

Alberto Franco

John Tober

We also have amended the Company’s bylaws today to ensure that any decision to liquidate the Hometown segment could only be made after proper notice to stockholders and further deliberation and consideration by the Board. The bylaw amendment requires that any such decision can only be made if voted upon by the Board in two meetings at least 30 business days apart with the support of at least of 90% of the directors then in office.

We encourage the Board to consider alternatives to a liquidation of the Hometown Business. We also expect that we will propose that Transform and the Company cooperate to reduce their collective cost structure, including by sharing technology and other operational resources. Any transactions between the Company and Transform would be approved by a committee of independent directors of the Board, and would be on arm’s length terms. We also encourage the Board to consider whether the Company should terminate its NASDAQ listing and the registration of its common stock under the Securities Exchange Act of 1934. We believe that such steps would provide significant cost savings to the Company.

We look forward to engaging with the Board and other stockholders of the Company in evaluating the best path forward for the Company.

 

 

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ESL Investments, Inc.

1170 Kane Concourse

Bay Harbor Islands, FL 33154

April 15, 2019

Board of Directors

Sears Hometown and Outlet Stores, Inc.

5500 Trillium Blvd., Suite 501

Hoffman Estates, IL 60192

Members of the Board:

As you know, on April 5, 2019, Transform Holdco LLC (“Transform”) sent you a non-binding proposal to acquire all of the outstanding shares of Sears Hometown and Outlet Stores, Inc. (the “Company”) not already owned by ESL Investments, Inc. and its affiliates (“ESL”) for a purchase price of $2.25 per share in cash, a 23.6% premium to the volume weighted average price for the previous five trading days ($1.82) through April 5, 2019 (the “Proposal”).

Transform provided you with the Proposal after you had communicated to us that, absent a transaction, the Company’s Board of Directors (the “Board”) was likely to determine to liquidate the Company’s Hometown segment (the “Hometown Business”). As you know, ESL owns approximately 58% of the Company’s outstanding stock and strongly disagrees with any decision by the Board to liquidate the Hometown Business. We believe any such decision would significantly diminish the Company’s value and create significant risk should the Outlet segment’s recent one-year profit performance prove ephemeral.

Any decision to liquidate the Hometown Business would also negatively affect many of the Company’s other stakeholders, including the many Hometown owners and their families, who have supported the Company for more than 25 years, along with their employees and the communities that they serve. Transform emphasized that these owners have a vested interest in seeing the Hometown business remain operating and that, as a new owner, Transform would make investments, including subsidies in the short term, to preserve the network of Hometown stores and encourage these long time owners to continue to operate their businesses.

The special committee of the Board’s advisors communicated to Transform on April 7, 2019 that the special committee concluded that a transaction on the terms contemplated by Transform’s Proposal would not be in the best interests of the Company’s unaffiliated stockholders. Since that time, ESL has engaged with the Board to reconsider its plan to liquidate the Hometown Business and Transform has engaged with the special committee and its advisors to determine whether the parties could agree on terms for a negotiated transaction.

The special committee continues to request a price for a transaction that would represent an unprecedented premium to the market value of the Company’s stock. While we disagreed with the decision to operate as an Outlet-only business, Transform also proposed, at the special committee’s request, acquiring the inventory and assets associated with the Hometown Business, but these proposed terms were rejected as well.

We were informed that unless Transform reaches agreement with the Board and special committee by today, the Board was expected to vote to liquidate the Company’s Hometown Business this afternoon.

As we strongly disagreed with this decision and saw no hope of Transform reaching agreement with the special committee on a transaction given its unrealistic proposal, we decided today to replace two of the directors with individuals that we hope, together with the remaining members of the Board, will listen to the views of the Company’s stockholders and consider additional paths forward for the Company. We removed William K. Phelan and David B. Robbins and replaced them with the following individuals:

Alberto Franco

John Tober

 

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We also have amended the Company’s bylaws today to ensure that any such decision could only be made after proper notice to stockholders and further deliberation and consideration by the Board. The bylaw amendment requires that any such decision can only be made if voted upon by the Board in two meetings at least 30 business days apart with the support of at least 90% of the directors then in office.

We encourage the Board to consider alternatives to a liquidation of the Hometown Business. We also expect that we will propose that Transform and the Company cooperate to reduce their collective cost structure, including by sharing technology and other operational resources. Any transactions between the Company and Transform should be approved by a committee of independent directors of the Board, and be on arm’s length terms. We also encourage the Board to consider whether the Company should terminate its NASDAQ listing and the registration of its common stock under the Securities Exchange Act of 1934. We believe that such steps would provide significant cost savings to the Company.

We look forward to engaging with the Board and other stockholders of the Company in evaluating the best path forward for the Company.

 

Also during the morning of April 15, 2019, Cleary Gottlieb, on behalf of Transform, sent a notice under the confidentiality agreement to Shearman & Sterling notifying the Company that, as permitted by the confidentiality agreement, Transform was electing that the provisions of the confidentiality agreement that restricted the ability of Transform and its representatives from communicating with the Company and its directors, officers and employees, other than through the Special Committee and its advisors, would no longer apply. Later the same day, Mr. Lampert contacted Mr. Powell and another member of the Board of Directors (but not the Special Committee) to explain his rationale for taking the ESL Action, including the desire to preserve the value of the Company as a going concern, and to express his interest in continuing discussions with the Special Committee regarding a potential transaction. On April 16, 2019, representatives of Cleary Gottlieb contacted representatives of Shearman & Sterling to convey a substantially similar message.

Because a liquidation of the Company’s Hometown Segment would constitute a Liquidation Action within the meaning of the ESL Bylaw Amendment, the special meeting of the Board of Directors that had been scheduled for the afternoon of April 15, 2019 was cancelled. The Company’s lenders, after becoming aware of the ESL Action on the same day, also notified the Company that they were no longer willing to execute the waiver and amendment agreements that the Company had negotiated with them in preparation for the potential liquidation of the Hometown Segment and that would also have extended the maturity of the credit agreements.

On April 17, 2019, the Special Committee (now consisting of only Mr. Longino) held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling reviewed the ESL Action and provided a more general situational update. Mr. Longino noted that he was continuing to consider whether he would be willing to continue to serve on the Special Committee, either alone or alongside new members that may be appointed by the Board of Directors, given the actions taken pursuant to the ESL Action. The Special Committee and its advisors then discussed possible responses, and their advantages and disadvantages, to the ESL Action, including commencing a legal challenge to the ESL Action and the enforceability of the ESL Bylaw Amendment. In considering the advisability of recommending, or not recommending, this response to the Board of Directors, the Special Committee considered, among other factors, the time and expense involved in pursuing a legal challenge, the risk that any legal challenge would be unsuccessful, the continuing financial and operational challenges facing the

 

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Company as a result of the performance of the Hometown Segment and the possibility that, in response to commencing any legal challenge, ESL might have taken further unilateral stockholder action to replace members of the Board of Directors with individuals who would support withdrawing that legal challenge. The Special Committee and its advisors also discussed the possibility of continuing transaction discussions with Transform, the likely negative impact of the ESL Bylaw Amendment on the Company valuation analyses that had previously been performed by PJ Solomon and the reaction of the Company’s lenders to the ESL Action. Following this discussion, the Special Committee preliminarily concluded that even if the Company were successful in challenging the ESL Action, an outcome which was not certain, the Company would likely be in a materially weaker financial position, and potentially in default under its credits agreements, at the conclusion of the legal challenge and that any relief granted or damages awarded to the Company were unlikely to put the Company and its unaffiliated stockholders in a better position as compared to a negotiated transaction with Transform, which the Special Committee believed to be reasonably achievable in the near future.

Later in the day on April 17, 2019, the Board of Directors (now reflecting the removal of Mr. Phelan and Mr. Robbins, and the addition of Mr. Franco and Mr. Tober) held a special meeting at which members of Company senior management who were not also directors, and representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling reviewed the ESL Action with the Board of Directors and provided a more general situational update. Representatives of PJ Solomon provided a comprehensive overview of the events that had occurred subsequent to the discussions that Mr. Lampert had initiated with Mr. Powell in November 2018 regarding a potential transaction, including the discussions between PJ Solomon and Mr. Lampert that had occurred in the days prior to the ESL Action, and the Board of Directors also discussed the contacts that Mr. Lampert had made with the Company following the ESL Action.

Company senior management described for the Board of Directors the negative reaction of the Company’s lenders to the ESL Action and their stated unwillingness to continue amendment discussions and reviewed the Company’s current financial position, as well as the likelihood that the audit opinion included in the Company’s Form 10-K for the fiscal year ended February 2, 2019 to be filed with the SEC no later than May 3, 2019 would include a “going concern” qualification because the Company’s credit agreements would mature in less than twelve months, and that this qualification would cause an event of default under the credit agreements unless waived by the lenders (a “Going Concern Waiver”). Representatives of Shearman & Sterling and Richards Layton also reviewed with the Board of Directors the implications of the removal of Mr. Phelan and Mr. Robbins from the Board of Directors and the Special Committee and the continued existence and functioning of the Special Committee, were there to be further engagement with Mr. Lampert, as well as the standards that Delaware courts would apply in determining whether members of the Special Committee are independent and disinterested. The Board of Directors and other meeting participants engaged in a further discussion regarding the composition of the Special Committee, and the Board of Directors preliminarily concluded that it would be advisable to not appoint additional members to the Special Committee, assuming that Mr. Longino were willing to continue to serve as the Special Committee’s sole member. Mr. Longino committed to advise the Board of Directors of his decision within 24 hours, and the Board of Directors, pending Mr. Longino’s response, directed Company management to assist PJ Solomon in updating financial analyses that may be needed by the Special Committee.

During the evening of April 17, 2019, representatives of Shearman & Sterling and Cleary Gottlieb discussed the potential timing for further transaction discussions, should the Special Committee determine that engaging in those discussions was advisable.

On April 18, 2019, Mr. Longino confirmed his willingness to continue to serve as the Special Committee’s sole member, and the Board of Directors, acting by unanimous written consent, confirmed the prior establishment and continued existence and powers of the Special Committee.

Also on April 18, 2019, the Special Committee held a meeting at which representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Special Committee.

 

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Representatives of PJ Solomon discussed with the Special Committee the status of the updated financial projections being prepared by Company management to take account of the ESL Action and of PJ Solomon’s related valuation work. The Special Committee and its advisors then continued their discussion from the prior Special Committee meeting of possible courses of action, and related timing, cost and other considerations, that the Company could take in response to the ESL Action, including commencing a legal challenge to the ESL Action and the enforceability of the ESL Bylaw Amendment, approving the liquidation of the Company’s Hometown Segment in accordance with the procedures set forth in the ESL Bylaw Amendment, seeking to raise capital through a common stock rights offering, disengaging from transaction discussions with Transform and continuing transaction discussions with Transform. Representatives of Shearman & Sterling then reviewed for the Special Committee certain terms, in addition to the amount of the merger consideration, of a Company Transaction that would need to be negotiated in connection with finalizing a merger agreement, including the treatment of restricted stock units and other employee awards in the transaction, and the positions (and potential implications of those positions) that the Special Committee could take. After further discussion, the Special Committee concluded that continuing transaction discussions with Transform would be more advantageous to the Company, on a time-, risk-, and potential outcome-adjusted basis, as compared to commencing a legal challenge to the ESL Action, and directed PJ Solomon to contact Mr. Lampert and indicate that the Special Committee was prepared to engage in further transaction discussions and that it preferred a Hometown Transaction, assuming acceptable terms could be negotiated.

This communication occurred on April 19, 2019, the following day. On the same day, representatives of Shearman & Sterling and Cleary Gottlieb also discussed timing for potential further transaction discussions.

Also on April 19, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling reviewed with the Special Committee the discussions that had occurred earlier in the day with Mr. Lampert and representatives of Cleary Gottlieb, and the Special Committee and its advisors discussed alternative means of seeking to progress transaction discussions with Transform regarding both a Hometown Transaction and a Company Transaction. After this discussion, the Special Committee directed Shearman & Sterling to contact Cleary Gottlieb and request additional information on the contingent value right feature of a Company Transaction that Mr. Lampert had previously discussed, including with respect to terms that Transform would be willing to offer that would protect the ability of the Company, following the closing of the transaction, to achieve applicable payment thresholds. This communication occurred later in the same day, and representatives of Cleary Gottlieb indicated that they would discuss the matter with Mr. Lampert.

On April 22, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the status of the updated financial modeling being performed by Company management, including related valuation work being performed by PJ Solomon, as well a potential proposal that the Special Committee could make to Transform, once the modeling was complete, regarding a Hometown Transaction that included the provision to the Company of junior debt financing from ESL to allow the Company to maintain appropriate liquidity levels.

On April 23, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed certain aspects of the contingent value right feature of a Company Transaction that Mr. Lampert had previously discussed, including potential calculation methodologies and triggers, covenants and audit and reporting rights.

Later in the day on April 23, 2019, the Special Committee held an in-person meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon discussed with the Special Committee the updated valuation work being performed by PJ Solomon based on the updated financial projections provided by Company management that took account of the impact of the ESL Bylaw Amendment. The Special Committee and its advisors also discussed potential alternative courses of action, and their benefits and risks, including seeking to sell the

 

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Company’s Outlet Segment to a third party purchaser with the support of ESL given the significantly different views on the value of that business held by the Special Committee and ESL, disengaging from further transaction discussions with Transform and seeking to utilize the contingent value rights feature discussed by Mr. Lampert in a Company Transaction.

On April 24, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the status of the Company’s efforts to obtain a Going Concern Waiver from its lenders, as well as the possibility that ESL could take further unilateral stockholder action to seek to consummate a transaction with the Company. Representatives of PJ Solomon also reviewed with the Special Committee updated Company valuation work PJ Solomon had performed, which resulted in a range of implied equity values of up to $3.82 per share of Company Common Stock when using the updated financial projections provided by Company management that assumed the continued operation of the Company’s Outlet Segment and Hometown Segment (as more fully described in the section entitled “Unaudited Projected Financial Information of the Company – Summary of the Post-ESL Bylaw Amendment Projections” beginning on page 59 of this information statement) and, for comparison purposes, of $4.43 to $11 per share of Company Common Stock using a sum-of-the-parts valuation methodology assuming that a liquidation of the Hometown Segment were to occur and the Company realized net value equal to 70.0% of the book value of the inventory of the Hometown Segment.

On April 25, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon reviewed with the Special Committee an analysis PJ Solomon had performed of the historical trading levels of Company’s stock price. The Special Committee and its advisors also discussed potential courses of action the Special Committee could take. At the conclusion of the discussion, the Special Committee determined that it would be advisable to try to better understand ESL’s and Transform’s present intentions and directed Shearman & Sterling to contact Cleary Gottlieb and inquire as to whether Transform (i) would submit the proposal referred to in its April 15, 2019 letter regarding potential cooperation between Transform and the Company to reduce their collective cost structure and (ii) intended to continue to abide by the statement in its April 5, 2019 letter that Transform would only intend to proceed with its transaction proposal of the same date if it is approved by the full Board of Directors upon the recommendation of the Special Committee. The Special Committee and its advisors also discussed the outlook for the Company’s Outlet Segment, and how it was anticipated to operate on a go-forward basis in the absence of a transaction with Transform. The Special Committee directed its advisors to arrange a call with Company senior management to discuss this topic in more detail, and that call occurred later in the same day.

Later in the day on April 25, 2019, the Special Committee held another meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling updated the Special Committee on the discussion they had with representatives of Cleary Gottlieb following the meeting of the Special Committee earlier in the day and reported that Cleary Gottlieb had indicated that Transform (i) was not intending, at the present time, to submit the proposal referred to in its April 15, 2019 letter regarding potential cooperation between Transform and the Company to reduce their collective cost structure, but might be prepared to do so in the future depending on the circumstances, and (ii) was not, at the present time, affirming or withdrawing the statement in its April 5, 2019 letter that Transform would only intend to proceed with its transaction proposal of the same date if it is approved by the full Board of Directors upon the recommendation of the Special Committee. The Special Committee and its advisors also discussed potential alternative courses of action, and the Special Committee directed PJ Solomon to contact Mr. Lampert and discuss potential transactions with him, including a Hometown Transaction and a transaction involving the sale of the Company’s Outlet Segment to a third party.

On April 26, 2019, representatives of PJ Solomon and Mr. Lampert discussed potential transactions that could bridge the Company’s and Transform’s valuation gap with respect to the Outlet Segment, including a Company

 

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Transaction in which the Company would, following the execution of a merger agreement, have the opportunity to effect an Outlet Sale, which would allow any realized proceeds in excess of Transform’s valuation to be shared among all of the Company’s stockholders (an “Outlet Go Shop Transaction”). Mr. Lampert expressed an interest in Transform and the Company exploring such a transaction.

Later in the day on April 26, 2019, the Special Committee held another meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon updated the Special Committee on the discussion that had occurred earlier in the day with Mr. Lampert, including his expressed interest in Transform and the Company pursuing a potential Outlet Go Shop Transaction. The Special Committee and its advisors discussed various aspects of a potential Outlet Go Shop Transaction, including structuring alternatives, potentially interested buyers of the Outlet Segment, potential value implications for the Company’s unaffiliated stockholders and execution risks. The Special Committee and its advisors also discussed potential alternative courses of action and their benefits and risks, including the possibility of PJ Solomon contacting Mr. Lampert to engage in further discussions regarding a potential Company Transaction that was not an Outlet Go Shop Transaction.

On April 30, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of PJ Solomon and Shearman & Sterling further reviewed with the Special Committee a number of aspects of a potential Outlet Go Shop Transaction, including potential structures and mechanics for implementing such a transaction. The Special Committee and its advisors also discussed the potential benefits and risks of such a transaction.

On May 1, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling and Richards Layton were present at the invitation of the Board of Directors. Representatives of Shearman & Sterling and Richards Layton discussed the ESL Bylaw Amendment with the Board of Directors, including the requirements imposed by the ESL Bylaw Amendment for the Board of Directors’ approval of certain strategic decisions related to the Company’s business, the challenges involved in monitoring the Company’s compliance with the ESL Bylaw Amendment in light of certain vagueness and ambiguities in its text and the scope of activities the Company could undertake without first obtaining the Board of Director approvals required by the ESL Bylaw Amendment, as well as the process, costs and uncertainty that would be involved in any legal challenge to the ESL Bylaw Amendment by the Company. Mr. Longino and the Special Committee’s advisors then updated the Board of Directors on the recent activities of the Special Committee, including discussions regarding a potential Outlet Go Shop Transaction. Company senior management reviewed with the Board of Directors the status of the Company’s discussions with its lenders regarding a Going Concern Waiver, including the lenders’ willingness to provide the Going Concern Waiver, subject to various terms, including a requirement that all amounts outstanding under the Company’s credit agreements be repaid at the closing of any merger or similar acquisition transaction with Mr. Lampert or his affiliated entities. Members of the Company’s senior management also reviewed with the Board of Directors the state of the Company’s business and the continuing deterioration in the Hometown Segment’s results of operations and prospects, including as a result of worsening comparable store sales, Kenmore and Craftsman product availability issues, increasing supply chain costs and the increasing number of dealers who were refusing to meet their contractual obligations to the Company.    

On May 2, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the update that the Board of Directors had received the prior day from Company senior management regarding the state of the Company’s business, as well as the potential benefits and risks of continuing transaction discussions with Transform in light of that update. Representatives of PJ Solomon reviewed with the Special Committee its preliminary financial analyses of a potential Outlet Sale, and the Special Committee and its advisors discussed the process of engaging in further discussions with Mr. Lampert regarding the potential structure of an Outlet Sale. Following this discussion, the Special Committee directed PJ Solomon and Shearman & Sterling to finalize materials discussing that transaction and to send them to Mr. Lampert and Cleary Gottlieb later that day.

 

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On May 3, 2019, representatives of PJ Solomon and Mr. Lampert discussed the materials addressing an Outlet Sale, as well as alternative potential transaction structures that contemplated (i) a Company Transaction with a contingent value right based on the performance of the Outlet Segment, (ii) the sale of the Hometown Segment to Transform, followed by the marketing and potential sale of the Company (then owning only the Outlet Segment) to a third party purchaser (a “Hometown First Transaction”) and (iii) a Company Transaction supplemented to provide for a post-closing marketing and potential sale of the Outlet Segment to a third party purchaser. Mr. Lampert indicated that, in light of the uncertainties facing the Company’s Hometown Segment, he believed it would be important to engage in a transaction that would allow Transform to manage and stabilize the Company’s Hometown Segment as quickly as possible.

Later in the day on May 3, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon updated the Special Committee on their conversation with Mr. Lampert earlier in the day, and the Special Committee and its advisors discussed the benefits and risks of the alternative transaction structures, including in comparison to an Outlet Go Shop Transaction and Company Transaction with the contingent value right feature that previously had been discussed by Mr. Lampert.

Later in the day on May 3, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed structuring aspects of the alternative transactions that Mr. Lampert and representatives of PJ Solomon had discussed. Also on May 3, 2019, the Company and its lenders executed waiver, consent and amendment agreements providing for the Going Concern Waivers and the other terms discussed at the May 1, 2019 meeting of the Board of Directors.

On May 5, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon updated the Special Committee on their conversation with Company management regarding the Hometown First Transaction structure discussed with Mr. Lampert, including with respect to updated financial modeling that Company management was performing with respect to Hometown inventory values and Company liquidity needs, and discussed with the Special Committee the fact that a Hometown First transaction structure would likely need to include a component of financing from ESL to the Company to support the Company’s liquidity position. The Special Committee and its advisors also discussed the benefits and risks of a Hometown First Transaction, including the risk of the Company’s Outlet Segment not performing well following the sale of the Hometown Segment to Transform, as well as the benefits and risks of other transaction structures that had been discussed with Mr. Lampert. Based on the Special Committee’s beliefs regarding which transaction structures were likely to be acceptable to Transform, as well as the relative benefits and risks of those transaction structures, the Special Committee directed its advisors to finalize a draft term sheet draft contemplating the Hometown First transaction structure and providing for a purchase price equal to 66.5% of the book value of transferred inventory and a $25 million bridge loan from ESL or one of its affiliated entities to the Company, and to send the term sheet to Cleary Gottlieb later that day.

On May 8, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed the draft term sheet. The representatives of Cleary Gottlieb stated that after further consideration, including in light of concerns regarding the risks to the Company of operating only its Outlet Segment, Mr. Lampert believed an Outlet Go Shop Transaction presented a better path forward and that Cleary Gottlieb would be sending a revised term sheet later in the day reflecting this transaction structure, which revised term sheet was sent to Shearman & Sterling later that day. The representatives of Cleary Gottlieb also stated that Transform was considering an Outlet Go Shop Transaction that would include base merger consideration of $2.25 per share, the right of the Company to sell the Outlet Segment for net sale proceeds of $103 million (the “Outlet Sale Minimum Proceeds Amount”) or more with the Company’s unaffiliated stockholders participating pro rata in net proceeds above that threshold, the right of Transform to match any proposed Outlet Sale that would generate net proceeds of at least $103 million but less than $125 million (the “Transform Matching Ceiling”), a period of 75 days from the signing of the merger agreement to enter into a definitive agreement providing for an Outlet Sale (the “Outlet Marketing Period”) and a

 

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period of 120 days from the signing of the merger agreement to close an Outlet Sale (the “Outlet Closing Period”).

On May 9, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling reviewed with the Special Committee the terms of the revised term sheet received from Cleary Gottlieb the prior day and the other terms of the Outlet Go Shop Transaction that Cleary Gottlieb had communicated Transform was considering, and representatives of PJ Solomon reviewed its preliminary financial analysis of the economic terms set forth in the term sheet and such other terms under consideration. The Special Committee and its advisors also discussed certain aspects of the term sheet that needed to be clarified, as well as responsive positions that the Special Committee could take in a further revised draft of the term sheet.

On May 10, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon reviewed with the Special Committee an updated preliminary financial analysis of the economic terms set forth in the term sheet received from Cleary Gottlieb on May 8, 2019 and the other terms under consideration by Transform, which took into account certain clarifications that had been received from Cleary Gottlieb subsequent to their transmission of the term sheet and also included an analysis of the potential impact of structuring the transaction so that all outstanding Company restricted stock units would be entitled to receive merger consideration at the closing of the transaction. The Special Committee and its advisors discussed the potential benefits and risks of the Outlet Go Shop Transaction structure, including with respect to the proposed matching right in favor of Transform, as well as the potential marketing and sale process that the Company would engage in during the Outlet Marketing Period contemplated by the Outlet Go Shop Transaction and the range of potential outcomes that might, or might not, be achieved. The Special Committee and its advisors also discussed potential revisions to the term sheet that might be proposed to Transform, including with respect to the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling, the Outlet Marketing Period and the Outlet Closing Period and the Special Committee directed Shearman & Sterling to revise the term sheet to reflect the positions discussed at the meeting and to send it to Cleary Gottlieb.

Later in the day on May 10, 2019, Shearman & Sterling sent the revised draft to Cleary Gottlieb. The revisions reflected, among other terms, an Outlet Sale Minimum Proceeds Amount of $92.3 million, a Transform Matching Ceiling of $115 million, an Outlet Marketing Period of 85 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 145 days from the signing of the merger agreement, extendable by 15 days in certain circumstances and the full acceleration, at the closing of the merger, and payout, in the amount of the merger consideration (as adjusted in the case of a successful sale of the Outlet Segment), of all outstanding Company restricted stock units.

On May 12, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed the revised term sheet that Shearman & Sterling had sent to Cleary on May 10, 2019, the process for progressing transaction negotiations and additional information requests from Mr. Lampert, including in respect of the historical working capital level of the Outlet Segment. Later in the day on May 12, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee, to discuss transaction status.

On May 18, 2019, Cleary Gottlieb sent Shearman & Sterling a draft merger agreement reflecting an Outlet Go Shop Transaction structure. The draft merger agreement did not reflect a specific Outlet Sale Minimum Proceeds Amount or Transform Matching Ceiling amount, but did reflect, among other terms, base merger consideration of $2.25 per share, an Outlet Marketing Period of 75 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 120 days from the signing of the merger agreement, extendable by 15 days in certain circumstances, and did not provide for the full acceleration at the closing of the merger and payout of all outstanding Company restricted stock units.

 

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On May 20, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed various aspects of the draft merger agreement and potential transaction, including the scope of potential rights that Transform might have during the pendency of the potential transaction in respect Company’s Hometown business.

On May 21, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. Representatives of Shearman & Sterling reviewed with the Special Committee the terms of the draft merger agreement that had been received from Cleary Gottlieb, including with respect to (i) the proposed length of the Outlet Marketing Period and the Outlet Closing Period and the proposed parameters of the Company’s right to market and potentially enter into a definitive Outlet Sale agreement during the Outlet Marketing Period, and (ii) the proposed structure of the merger, including that the requisite stockholder approval would be given by ESL in connection with the signing of the merger agreement and that consequently the draft merger agreement did not contain a “fiduciary out” in relation to unsolicited third party acquisition proposals or generally permit the Special Committee or the Board of Directors to change its recommendation in favor of the merger. The Special Committee and its advisors discussed the potential benefits and risks of the terms proposed on the draft merger agreement, as well as potential revisions to those terms that the Special Committee could propose.

On May 22, 2019, Shearman & Sterling sent a revised merger agreement to Cleary Gottlieb that reflected the Special Committee’s comments, other than with respect to the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling amount, the Outlet Marketing Period and the Outlet Closing Period, which terms remained under consideration by both the Special Committee and Transform.

On May 23, 2019, representatives of Cleary Gottlieb and Shearman & Sterling discussed a number of issues in relation to the potential transaction, including the treatment of working capital and the Special Committee’s understanding that Transform was not prepared to include a majority-of-the-minority stockholder vote condition in a potential transaction. Later in the day, Cleary Gottlieb contacted Shearman & Sterling to confirm that the Special Committee’s understanding on that topic was correct.

On May 24, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The Special Committee and its advisors discussed the principal open issues in the merger agreement, including the Outlet Sale Minimum Proceeds Amount, the Transform Matching Ceiling amount, the Outlet Marketing Period, the Outlet Closing Period and the treatment of Company restricted stock units, and potential positions on these issues that the Special Committee could propose to Transform. The Special Committee and its advisors also discussed the possibility of asking Transform to reconsider alternative transaction structures, including a Hometown Transaction, but believed that Transform would be unwilling to engage in discussions on alternative transaction structures on terms that the Special Committee would find acceptable and that Mr. Lampert had also repeatedly made clear, particularly in more recent discussions, that Transform would not engage in a transaction that would result in the Company continuing to own and operate only its Outlet Segment. Following this discussion, the Special Committee directed PJ Solomon to contact Mr. Lampert and communicate that the Special Committee was prepared to continue discussions concerning an Outlet Go Shop Transaction on the basis of an Outlet Marketing Period of 85 days from the signing of the merger agreement, extendable by 10 days in certain circumstances, an Outlet Closing Period of 160 days from the signing of the merger agreement, extendable by 15 days in certain circumstances, Outlet Sale Minimum Proceeds of $97.5 million and a Transform Matching Ceiling amount of $120 million.

Later in the day on May 24, 2019, Mr. Powell, at the request of the Special Committee, discussed with Mr. Lampert the approach to certain operational and employee matters in the potential transaction, and representatives of PJ Solomon separately discussed with Mr. Lampert the terms that the Special Committee had directed PJ Solomon to communicate.

On May 25, 2019, Cleary Gottlieb sent a revised merger agreement, and an initial draft of the Equity Commitment Letter (as defined below), to Shearman & Sterling. The draft merger agreement generally reflected

 

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the terms that representatives of PJ Solomon had communicated to Mr. Lampert the prior day (including a Transform Matching Ceiling amount of $120 million, an Outlet Sale Minimum Proceeds Amount of $97.5 million and an Outlet Marketing Period of 85 days), except with respect to the length of the Outlet Closing Period, which the draft proposed would end on October 16, 2019 (144 days from the date of delivery of such draft merger agreement), extendable to October 31, 2019 in certain circumstances. The draft merger agreement also reflected other comments from Transform, including to the definition of Net Proceeds and the addition of financing cooperation covenants from the Company.

On May 26, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of Shearman & Sterling reviewed with the Special Committee the revised draft merger agreement and the draft Equity Commitment Letter that had been received from Cleary Gottlieb the prior day, the Special Committee discussed with its advisors potential revisions that it could propose to Transform in response. Shearman & Sterling sent revised drafts of the merger agreement and the Equity Commitment Letter to Cleary Gottlieb on May 27, 2019. The draft merger agreement included an Outlet Closing Period proposal of 145 days from signing of the merger agreement, extendable by 15 days in certain circumstances.

On May 27, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of PJ Solomon and Shearman & Sterling discussed with the Special Committee the status of negotiations, including with respect to ongoing discussions concerning the treatment of working capital in the transaction. Representatives of PJ Solomon reviewed with the Special Committee a financial analysis of the proposed transaction and the assumptions underlying that analysis, including that a Hometown liquidation plan previously prepared by Company management could not immediately be implemented in light of the ESL Bylaw Amendment. Representatives of Shearman & Sterling reviewed with the Special Committee its fiduciary duties in considering the proposed transaction, the material terms of the proposed transaction, including those that remained subject to ongoing discussion and negotiation between the parties such as the definition of Net Proceeds, the scope of the financing cooperation covenants, the merger agreement termination date and the treatment of Company restricted stock units and other employee awards in the proposed transaction.

Later in the evening of May 27, 2019, the Board of Directors held a special meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling, Richards Layton and Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”), counsel to the Audit Committee of the Board of Directors, were present at the invitation of the Board of Directors. At the meeting the representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on the status of, and recent developments in, transaction negotiations with Transform. Representatives of PJ Solomon also reviewed with the Board of Directors its financial analysis of the proposed transaction and the assumptions underlying that analysis, and representatives of Shearman & Sterling reviewed with the Board of Directors its fiduciary duties in considering the proposed transaction, the material terms of the proposed transaction and the material terms which remained subject to ongoing discussion and negotiation between the parties. At this meeting, the Board of Directors also confirmed that notwithstanding that a transaction with Transform would constitute a related party transaction, the Audit Committee was not required to separately approve any such transaction given the mandate of the Special Committee.

Between May 28, 2019 and the execution of the Merger Agreement on June 1, 2019, the parties and their advisors continued to exchange and discuss revised drafts of the Merger Agreement, Equity Commitment Letter and other transaction documentation, including discussions between Mr. Longino and Mr. Kamlani regarding the treatment of Company restricted stock units and other employee awards in the transaction and discussions between Company management and representatives of PJ Solomon, on the one hand, and Mr. Kamlani, on the other hand, regarding the treatment of working capital in the transaction.

 

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On May 28, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee, where remaining open issues and related conversations that were occurring with Mr. Kamlani were discussed.

On May 29, 2019, the Board of Directors held a special in-person meeting at which members of Company senior management who were not also directors and representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Board of Directors. The representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on the ongoing transaction discussions with Transform and its representatives, including with respect to issues that remained open. The Board of Directors and other meeting participants also discussed the effects on the Company’s businesses that could arise if the negotiations with Transform were to continue without an expeditious resolution, and Company senior management reviewed with the Board of Directors certain alternatives, and their risks, including in light of the ESL Bylaw Amendment, that the Company could seek to implement to protect its value in the absence of a transaction with Transform.

On May 30, 2019, Cleary Gottlieb sent a revised draft merger agreement to Shearman & Sterling, which draft, among other things, accepted the Outlet Closing Period in Shearman & Sterling’s May 26, 2019 draft of the merger agreement.

On May 31, 2019, the Special Committee held a meeting at which representatives of PJ Solomon and Shearman & Sterling were present at the invitation of the Special Committee. The representatives of Shearman & Sterling updated the Special Committee on transaction status and conversations with Transform and its representatives, the terms of the Merger Agreement and related transaction documents and how open issues related to the Merger Agreement and other transaction documents had been resolved. Representatives of PJ Solomon again reviewed PJ Solomon’s financial analysis of the proposed transaction (as more fully described in the section entitled “Special Factors—Opinion of PJ Solomon” beginning on page 45 of this information statement) and then orally rendered the opinion of PJ Solomon, which was subsequently confirmed in writing that, as of May 31, 2019 and subject to the assumptions set forth in the draft written opinion that had been circulated to the Special Committee, the Base Merger Consideration to be paid to the Company’s unaffiliated stockholders pursuant to the Merger Agreement is fair, from a financial point of view, to such unaffiliated stockholders.

Following a discussion among the Special Committee and its advisors regarding the proposed transaction, and after considering the proposed terms of the Merger Agreement and the other transaction agreements and the presentations of its advisors, the Special Committee determined that the Merger Agreement and the proposed transactions were fair to and in the best interests of the Company and its unaffiliated stockholders, approved the Merger Agreement and the proposed transactions and resolved to recommend that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the proposed transactions and recommending that the Merger Agreement be adopted by the stockholders of the Company.

The Board of Directors held a special meeting thereafter at which members of Company senior management who were not also directors and representatives of PJ Solomon, Shearman & Sterling, Richards Layton and Pillsbury were present at the invitation of the Board of Directors. Mr. Longino and the representatives of PJ Solomon and Shearman & Sterling updated the Board of Directors on transaction status and conversations with Transform and its representatives, the terms of the Merger Agreement and related transaction documents, how open issues related to the Merger Agreement and other transaction documents had been resolved and on the determinations reached, and recommendation made by, the Special Committee prior to the meeting of the Board of Directors.

Company senior management again reviewed with the Board of Directors the status of the Company’s business and financial position and outlook, including with respect to the significant challenges that the Company would continue to face in the absence of a transaction with Transform.

Representatives of PJ Solomon again reviewed its financial analysis of the proposed transaction (as more fully described in the section entitled “Special Factors—Opinion of PJ Solomon” beginning on page 45 of this

 

39

information statement) and then orally rendered to the Board of Directors the same opinion it had rendered at the earlier Special Committee meeting.

Following a discussion, the Board of Directors unanimously determined that the Merger Agreement and the proposed transactions were fair to and in the best interests of the Company and its unaffiliated stockholders, approved, adopted and declared advisable the Merger Agreement and the proposed transactions, directed that the Merger Agreement be submitted to the Company’s stockholders for adoption and resolved to recommend that the Merger Agreement be adopted by the stockholders of the Company.

The Merger Agreement, the Equity Commitment Letter and the ESL Letter Agreement were executed on June 1, 2019, and the Company and Transform issued a joint press release on June 3, 2019 prior to the open of trading on NASDAQ announcing the transaction.

Recommendation of the Special Committee and Reasons for Recommendation

Recommendation of the Special Committee

On May 31, 2019, the Special Committee (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL), (ii) approved the Merger Agreement and the transactions contemplated thereby and declared the Merger Agreement advisable, and (iii) recommended that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company.

Reasons for Recommendation

In evaluating the Merger Agreement and the Merger, the Special Committee consulted with the Company’s senior management and its outside legal and financial advisors and, in reaching its determination to recommend that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company, the Special Committee relied upon and considered numerous factors, including the material factors set forth below (which are not intended to be exhaustive and are not presented in any order of relative importance or significance):

Process and Consideration of Alternatives

 

•

The belief, based on a review of the other possible alternatives to a sale of the Company, including the prospects of continuing to operate in accordance with the Company’s standalone plan, the potential value to the Company’s stockholders of such alternatives and the timing and likelihood of actually achieving additional value for such stockholders from these alternatives, that none of these options, on a risk- and time-adjusted basis, was reasonably likely to create value for the Company’s stockholders greater than the Merger Consideration.

 

•

The fact that no third party approached or made any contact with the Company or its representatives regarding a potential acquisition of the Company from April 8, 2019 (the date the Company publicly announced that it had received an acquisition proposal from Transform) through May 31, 2019 (the date the Special Committee approved the Merger Agreement).

 

•

The Special Committee’s belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment constituted the best strategic alternative for the Company and its stockholders, but such course of action would require the Board of Directors to first comply with the requirements set forth in the ESL Bylaw Amendment, which would require a 30 business day period to elapse between the public announcement of the Board of Directors’ recommendation to liquidate the Hometown Segment and the actual commencement of the liquidation and therefore impose significant execution risks to the successful implementation and completion of the liquidation.

 

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Financial Terms; Certainty of Value

 

•

The belief that, the Base Merger Consideration of $2.25 per share in cash of Company Common Stock represents fair value for shares of Company Common Stock, taking into account the Company’s current and historical financial condition, results of operations, business, competitive position and prospects, the constraints imposed by the ESL Bylaw Amendment, as well as the Company’s standalone plan in the event the Company were to remain an independent public company.

 

•

The future prospects and risks associated with remaining an independent public company and the risks and uncertainties associated with the execution of the Company’s standalone plan, including in view of the deteriorating operating performance and growing operating losses of the Company’s Hometown Segment and the constraints imposed on the Company as a result of the ESL Bylaw Amendment.

 

•

The Special Committee’s belief that, following extensive discussions with Mr. Lampert, the Merger and the Merger Consideration comprised the best transaction terms the Special Committee could negotiate with ESL and therefore represented the highest possible value available for the Company’s unaffiliated stockholders given the absence of actionable alternative transactions with ESL or third parties and the significant operational challenges facing the Company if it continued on a standalone basis.

 

•

The belief that the Merger Consideration to be paid by Transform is the highest price per share of Company Common Stock that Transform was willing to pay, that the terms and conditions of the Merger Agreement were the most favorable to the Company and its stockholders to which Transform was willing to agree, and that continued efforts to obtain a higher price from Transform, or soliciting interest from unaffiliated third parties, would be unlikely to lead to a higher price from Transform or a more favorable transaction with an unaffiliated third party, and could lead to the loss of the proposed transaction with Transform.

 

•

The opportunity for the Company’s stockholders to realize substantial value based on the receipt of the Base Merger Consideration representing a premium of 18.4% to the closing share price of April 5, 2019, the last trading day prior to the Company’s announcement that it had received a proposal from Transform to acquire the Company, a premium of approximately 10.3% to the 30-day volume-weighted average price of shares of Company Common Stock as of April 30, 2019, and a premium of approximately 6.1% to the 90-day volume-weighted average price of shares of Company Common Stock as of May 31, 2019, the last trading day prior to the Company’s announcement of its entry into the Merger Agreement.

 

•

The terms of the Merger Agreement that had been negotiated to make it possible for the Company’s stockholders to realize additional value via an increase in the Base Merger Consideration in the event the Company successfully identifies a third party willing to purchase the Outlet Segment on the terms and conditions required by the Merger Agreement and is able to negotiate a transaction agreement with that third party and consummate an Outlet Sale that satisfies those conditions, or if Transform exercises its matching rights in respect of a proposed Outlet Sale that would result in Net Proceeds of less than $120,000,000.

 

•

The fact that the Merger Consideration consists solely of cash, which provides certainty of value and liquidity to the Company’s unaffiliated stockholders and does not expose them to any future risks related to the business or the financial markets generally, as compared to a transaction in which stockholders receive equity or other securities, or as compared to remaining an independent, standalone company.

 

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The oral opinion of PJ Solomon (which oral opinion was subsequently confirmed by delivery of a written opinion, dated as of May 31, 2019), provided to the Special Committee and the Board of Directors, to the effect that, as of that date and based on and subject to various procedures, assumptions and matters considered and the qualifications and limitations described in its opinion, the Merger Consideration to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement is fair, from a financial point of view to such holders. A copy of the PJ Solomon Opinion is attached to this information statement as Annex G.

 

•

The fact that appraisal rights will be available to the unaffiliated holders of Company Common Stock who properly exercise their rights under the DGCL, which would give these stockholders the ability to seek and

 

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be paid a judicially determined appraisal of the “fair value” of their shares of Company Common Stock if they do not wish to accept the Merger Consideration.

Prospects of the Company

 

•

The Company’s current and historical business, financial condition, results of operations, competitive position, strategic options and prospects, as well as the Company’s standalone plan in the event the Company were to remain an independent public company, the risks and challenges associated with remaining an independent public company and the risks and uncertainties associated with the execution of the standalone plan, and the potential impact of those factors on the future trading price of Company Common Stock, including risks related to:

 

•

the general business environment for, and impact of general economic conditions on, the retail industry, including a failure of the economy to sustain its recovery, a renewed decline in consumer-spending levels and other conditions, which could lead to reduced revenues and gross margins, and negatively impact the Company’s results of operations;

 

•

the deteriorating operating performance and growing operating losses of the Company’s Hometown Segment coupled with the ESL Bylaw Amendment, which the Special Committee believed constrained the Company’s ability to successfully address such performance and losses;

 

•

the competitive landscape, the business, financial and execution risks and the Company’s relationships with customers, vendors and suppliers, including in respect of increasing supply chain costs and uncertainty being experienced by the Company, and the potential impact of those factors on the trading price of shares of Company Common Stock and the Company’s ability to execute its standalone plan in the event the Company were to remain an independent public company;

 

•

the amount of debt required by the Company to operate its business and the uncertainty and potential related costs associated with the possibility that the Company will need to obtain an extension of the Going Concern Waiver or refinance all of the debt outstanding under its credit agreements in the Company’s third fiscal quarter of 2019 (or the Company’s fourth fiscal quarter of 2019 in the event a Going Concern Waiver extension through such quarter were obtained) in the event the Company were to remain an independent public company;

 

•

the additional costs and burdens involved with being a public company;

 

•

the other risks and uncertainties identified in the Company’s filings with the SEC, including in its Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and its Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2019; and

 

•

the Special Committee’s belief, after consideration of the factors described in this section, that the consummation of the transactions contemplated by the Merger Agreement represent the Company’s best reasonably available alternative for maximizing stockholder value.

 

•

The Company’s reliance on Transform to provide access to certain computer systems, intellectual property and inventory used in our business pursuant to agreements between the Company and Transform, and the potential that Transform in the future may not be able or willing to continue to provide such access, intellectual property and inventory to the Company.

Likelihood of Consummation

 

•

The fact that Transform’s obligation to complete the transactions is not conditioned on Transform or Merger Subsidiary obtaining financing.

 

•

The fact that Transform agreed to take all actions necessary to cause the Merger Agreement closing condition relating to the payment in full or termination, as applicable, of all outstanding obligations and letters of credit under the Company’s credit agreements to be satisfied at or prior to closing of the Merger.

 

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•

The support of the Principal Stockholders who together held approximately 58.3% of the outstanding shares of Company Common Stock and who had agreed to deliver the Written Consent adopting the Merger Agreement and approving any Outlet Sale, which would result in the adoption of the Merger Agreement and the approval of any Outlet Sale becoming effective immediately following execution of the Merger Agreement and no further approval of the stockholders of the Company being required to adopt the Merger Agreement or approve any Outlet Sale.

 

•

The fact that the Merger Agreement requires Transform to use its reasonable best efforts to take actions necessary to satisfy the regulatory conditions set forth in the Merger Agreement, and includes a commitment by Transform to reasonably cooperate to obtain all applicable consents and approvals, as more fully described in the section entitled “The Merger Agreement—Other Covenants and Agreements—Reasonable Best Efforts” beginning on page 103 of this information statement.

Terms of the Merger Agreement

 

•

The Special Committee considered all of the terms and conditions of the Merger Agreement, including the representations, warranties, covenants and agreements of the parties, the conditions to closing, the form of the Merger Consideration and the termination rights, including:

 

•

that the terms of the Merger Agreement were the products of arm’s-length negotiations among sophisticated parties and their respective legal and financial advisors, as more fully described in “Special Factors—Background of the Transaction” beginning on page 19 of this information statement;

 

•

that the “go shop” provisions give the Company the ability to initiate, solicit and encourage inquiries, proposals and offers from third parties for a sale of the Company’s Sears Outlet and Buddy’s Home Furnishing Stores businesses to a third party on the terms and subject to the conditions of the Merger Agreement and to enter into a transaction agreement with a third party in respect of such a sale that, if consummated, could result in the Merger Consideration being greater than the Base Merger Consideration (as more fully described in the section entitled “The Merger Agreement—Other Covenants and Agreements—Sale of the Outlet Segment” beginning on page 97 of this information statement);

 

•

the fact that, subject to certain customary limitations, the Company will have sufficient operating flexibility for it to conduct its business in the ordinary course consistent with past practice during the pre-closing period; and

 

•

that the remedies of specific performance and monetary damages are available to the Company under the Merger Agreement as more fully described in the section entitled “The Merger Agreement—Specific Performance” beginning on page 107 of this information statement.

In addition to the factors above, the Special Committee identified and considered a variety of risks and potentially negative factors concerning the Merger, including:

 

•

the possibility that the Merger might not be consummated, and the risks and costs to the Company in such event, including the diversion of management and employee attention and the potential disruptive effect on business and customer relationships, vendor relationships, stock price and ability to attract and retain key management personnel and employees;

 

•

the possibility that the Company may not be able to consummate an Outlet Sale in accordance with the applicable terms and conditions set forth in the Merger Agreement, including due to the constraints imposed by the timeframe prescribed by the Merger Agreement, the potential deterrent effect of Transform’s right to match any proposed Outlet Sale that would result in Net Proceeds of less than $120,000,000, the fact that the Company did not have the unilateral right to modify the terms and conditions (including with respect to the scope of liabilities to be assumed by any purchaser of the Outlet Segment) upon which any Outlet Sale is required to be consummated by the Merger Agreement and the potential lack of interest in the Outlet Segment by third parties, which would result in there being no increase in the Base Merger Consideration;

 

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•

the fact that Transform is a private, newly formed entity;

 

•

the possibility that completion of the Merger might be delayed or subject to adverse conditions that may be imposed by governmental authorities that are not within the Company’s control, that, if the parties determine that a filing pursuant to the HSR Act is required, such approval may not be obtained, and the period of time the Company may be subject to the Merger Agreement without assurance that the Merger will be completed;

 

•

the fact that the Company’s obligations to provide financing cooperation to Transform are significant and the ability of the Company to provide certain financing information as required by the Merger Agreement could impact timing of completion of the Merger;

 

•

the fact that, as a result of the ESL Bylaw Amendment, the Board of Directors must approve any Outlet Sale by an affirmative vote of no less than 90% of directors then in office, which requires a unanimous vote given the present size of the Board of Directors;

 

•

the significant costs involved in connection with completing the Merger, the substantial management time and effort required to complete the Merger, and the related disruption to the Company’s operations;

 

•

the prohibition imposed on the solicitation or consideration by the Company of alternative transactions, and the absence of any ability of the Company to terminate the Merger Agreement in the event the Company were to receive a superior offer;

 

•

the interests that certain of the Company’s directors and executive officers may have with respect to the Merger in addition to their interests as the Company’s stockholders as described in “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 70 of this information statement; and

 

•

that any gain to be realized by the Company’s stockholders as a result of the Merger generally will be taxable to such stockholders for U.S. federal income tax purposes if they are not otherwise exempt from the payment of such taxes (as more fully described in “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 76 of this information statement.

The foregoing discussion of the information and factors considered by the Special Committee is not intended to be exhaustive, but rather includes the principal material information, factors and analyses considered by the Special Committee in reaching its conclusions and recommendation in relation to the Merger Agreement, the Merger and the other transactions contemplated thereby. The Special Committee evaluated the various factors listed above in light of its knowledge of the business, financial condition and prospects of the Company, in consultation with the Company’s senior management and outside legal and financial advisors. The Special Committee did not provide a specific assessment of, quantify or otherwise assign any relative weights to, the factors considered in determining its recommendation. Instead, the Special Committee conducted an overall analysis of the factors and reasons described above and determined in its business judgment that, in the aggregate, the potential benefits of the merger to the stockholders of the Company outweighed the risks or potential negative consequences.

Recommendation of the Board of Directors and Reasons for Recommendation

Recommendation of the Board of Directors

Upon receipt of the recommendation of the Special Committee, at a meeting of the Board of Directors duly called and held on May 31, 2019 to act on the Special Committee’s recommendation, the Board of Directors unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby are fair to, and in the best interests of, the Company and its stockholders (other than ESL), (ii) approved, adopted and declared advisable the Merger Agreement and the transactions contemplated thereby, (iii) directed that the Merger Agreement be submitted to the stockholders of the Company for their adoption and approval, and (iv) recommended that the Merger Agreement be adopted by the stockholders of the Company.

 

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Reasons for Recommendation

In reaching its determinations, the Board of Directors considered and adopted the analyses and conclusions of the Special Committee, including the factors described above, the determination of the Special Committee that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL) and the recommendation of the Special Committee that the Board of Directors adopt resolutions approving and declaring advisable the Merger Agreement and the transactions contemplated thereby and recommending that the Merger Agreement be adopted by the stockholders of the Company.

In addition to the factors described above, the Board of Directors also considered a variety of factors weighing positively in favor of the Merger Agreement and the transactions contemplated thereby, including the following (which are not intended to be exhaustive and are not presented in any order of relative importance or significance):

 

•

the fact that an active and engaged Special Committee composed of an independent and disinterested member of the Board of Directors who did not have a material interest in the potential transaction, declared the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL); and

 

•

the belief of the Board of Directors, based on its knowledge of the Company’s long-term strategic goals and opportunities, including in light of the terms of the ESL Bylaw Amendment, industry trends, competitive environment and performance in light of the Company’s standalone plan, including the potential impact of those factors on the trading price of the Company Common Stock (which cannot be precisely quantified numerically), and discussions with Company senior management and the Special Committee’s financial advisor, that the value offered to Company stockholders pursuant to the Merger Agreement is more favorable to Company stockholders than the potential value that might reasonably be expected to result from remaining an independent company.

The foregoing discussion of the information and factors considered by the Board of Directors is not intended to be exhaustive, but rather includes the principal material information, factors and analyses considered by the Board of Directors in reaching its conclusions and recommendation in relation to the Merger Agreement, the Merger and the other transactions contemplated thereby. The Board of Directors evaluated the various factors listed above in light of its knowledge of the business, financial condition and prospects of the Company, in consultation with the Company’s senior management and outside legal and financial advisors. The Board of Directors did not provide a specific assessment of, quantify or otherwise assign any relative weights to, the factors considered in determining its recommendation. Instead, the Board of Directors conducted an overall analysis of the factors and reasons described above and determined in its business judgment that, in the aggregate, the potential benefits of the merger to the stockholders of the Company outweighed the risks or potential negative consequences. Individual members of the Board of Directors may have given different weight to different factors. In addition, in arriving at its recommendation, the Board of Directors were aware of the interests of certain officers and directors of the Company as described in “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 70 of this information statement.

Opinion of PJ Solomon

Pursuant to an engagement letter dated November 13, 2018, as amended on April 4, 2019 and May 28, 2019, the Special Committee retained PJ Solomon to act as a financial and strategic advisor to the Special Committee in connection with the Merger. PJ Solomon is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions. The Special Committee selected PJ Solomon to act as its financial and strategic advisor on the basis of PJ Solomon’s knowledge of the Company and its industry and business, PJ Solomon’s experience and reputation advising public companies in transactions similar to the Merger and its reputation in the investment community, among other things.

 

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On May 31, 2019, at meetings of the Special Committee and the Board of Directors held to evaluate the Merger, PJ Solomon delivered to the Special Committee an oral opinion, which was subsequently confirmed by delivery of a written opinion dated May 31, 2019, to the effect that, as of the date of PJ Solomon’s opinion and based upon and subject to various assumptions and limitations described in its opinion, the $2.25 per share of Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement was fair from a financial point of view to such holders. PJ Solomon’s opinion was addressed to the Special Committee and to the Board of Directors and provided for the information and assistance of the Special Committee (in its capacity as such) and, at the request of the Special Committee, the Board of Directors (in its capacity as such) in connection with their consideration of the Merger.

The full text of PJ Solomon’s written opinion, which sets forth the assumptions made, procedures followed, matters considered, limitations on and scope of the review by PJ Solomon in rendering PJ Solomon’s opinion, is attached as Annex G and is incorporated herein by reference. PJ Solomon’s opinion was directed only to the fairness of the per share Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement from a financial point of view, was provided for the information of the Special Committee and the Board of Directors in connection with their evaluation of the Merger, did not address any other aspect of the Merger and did not express any opinion or view as to the relative merits of the Merger in comparison to other strategies or transactions, including any strategies or transactions that the Company is prevented from undertaking by its organizational documents, that might be available to the Company or in which the Company might engage or as to the Company’s underlying business decision to proceed with or effect the Merger. PJ Solomon did not evaluate and did not express any opinion regarding the liquidation value of any entity, asset or business. PJ Solomon assumed for purposes of its analysis that no additional consideration would become payable to the holders of shares of Company Common Stock as a result of any transaction involving the Outlet Segment pursuant to the Outlet Sale Process (as defined below), including any additional consideration that may become payable as a result of the Liberty Sale. PJ Solomon’s opinion also expressed no opinion or recommendation as to how any holder of shares of Company Common Stock should act in connection with the Merger or any related matter. The summary of PJ Solomon’s opinion set forth in this information statement is qualified in its entirety by reference to the full text of such opinion. Holders of shares of Company Common Stock are urged to read PJ Solomon’s opinion carefully and in its entirety. PJ Solomon has consented to the inclusion of PJ Solomon’s opinion in this information statement.

In arriving at its opinion, PJ Solomon, among other things:

 

•

reviewed certain publicly available financial statements and other information of the Company;

 

•

reviewed certain internal financial statements and other financial and operating data concerning the Company prepared and provided to PJ Solomon by the management of the Company and approved for PJ Solomon’s use by the Company;

 

•

reviewed certain financial projections for the Company prepared and provided to PJ Solomon by the management of the Company and approved for PJ Solomon’s use by the Company;

 

•

discussed the past and current operations, financial condition and prospects of the Company with management of the Company;

 

•

reviewed the reported prices and trading activity of the Company Common Stock;

 

•

compared the financial performance and condition of the Company and the reported prices and trading activity of the Company Common Stock with that of certain other publicly traded companies that PJ Solomon deemed relevant;

 

•

reviewed publicly available information regarding the financial terms of certain transactions that PJ Solomon deemed relevant, in whole or in part, to the Merger;

 

46

•

participated in certain discussions among management and other representatives of each of Transform and the Company;

 

•

reviewed a draft, dated May 31, 2019, of the Merger Agreement;

 

•

reviewed the organizational documents of the Company, including the Amended and Restated Bylaws of the Company, as amended as of April 15, 2019 (the “Bylaws”); and

 

•

performed such other analyses and reviewed such other material and information as PJ Solomon deemed appropriate.

PJ Solomon assumed and relied upon the accuracy and completeness of the information reviewed by PJ Solomon for the purposes of its opinion and PJ Solomon did not assume any responsibility for independent verification of such information and relied on such information being complete and correct. PJ Solomon relied on assurances of the management of the Company that they were not aware of any facts or circumstances that would make information provided by or on behalf of the Company inaccurate or misleading in any respect material to PJ Solomon’s opinion. With respect to the financial projections prepared and provided to PJ Solomon by the management of the Company, PJ Solomon assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of the Company of the future financial performance of the Company. PJ Solomon expressed no views as to the reasonableness of any such financial projections or the assumptions on which they are based. PJ Solomon did not conduct a physical inspection of the facilities or property of the Company. PJ Solomon did not assume any responsibility for or perform any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJ Solomon furnished with any such valuation or appraisal other than a plan for the liquidation of the Company’s Hometown Segment prepared by Company management as of April 8, 2019 (the “Management Liquidation Plan”). Although PJ Solomon reviewed the Management Liquidation Plan, PJ Solomon did not evaluate, and expressed no opinion, regarding the liquidation value of any entity, asset or business of the Company. Furthermore, PJ Solomon did not consider any tax, accounting or legal effects of the Merger or the transaction structure on any person or entity.

PJ Solomon assumed that the final form of the Merger Agreement would be substantially the same as the last draft reviewed by PJ Solomon and would not vary in any respect material to PJ Solomon’s analysis. PJ Solomon also assumed that the Merger would be consummated in accordance with the terms of the Merger Agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the consideration to be paid to the holders of shares of Company Common Stock in the Merger), and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on the Company or the contemplated benefits of the Merger. PJ Solomon further assumed that all representations and warranties set forth in the Merger Agreement were and will be true and correct as of all the dates made or deemed made and that all parties to the Merger Agreement will comply with all covenants of such parties thereunder.

PJ Solomon noted that under the terms of the Merger Agreement, the Company was permitted to conduct a process to effect an Outlet Sale (the “Outlet Sale Process”), which may result in consideration in addition to the Base Merger Consideration becoming payable to the holders of shares of Company Common Stock. The outcome of the Outlet Sale Process, including whether an Outlet Sale would occur at all and the terms on which any such transaction might occur, were not known on the date PJ Solomon gave its opinion. Accordingly, at the direction of the Special Committee, PJ Solomon assumed for purposes of its analysis that no additional consideration would become payable to holders of shares of Company Common Stock as a result of any transaction involving the Outlet Segment pursuant to the Outlet Sale Process. Therefore, PJ Solomon’s opinion does not consider or address any additional consideration that may become payable as a result of the Liberty Sale.

PJ Solomon’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to PJ Solomon as of, May 31, 2019. In particular, PJ Solomon did not express any

 

47

opinion as to the prices at which shares of Company Common Stock may trade at any future time or as to the impact of the Merger on the solvency or viability of the Company, Transform or Merger Subsidiary or the ability of the Company, Transform or Merger Subsidiary to pay their respective obligations when they come due. Furthermore, PJ Solomon’s opinion did not address the Company’s underlying business decision to undertake the Merger, and PJ Solomon’s opinion did not address the relative merits of the Merger as compared to any alternative transactions or business strategies that might be available to the Company. PJ Solomon’s opinion did not address any other aspect or implication of the Merger or any other agreement, arrangement or understanding entered into in connection with the Merger or otherwise except as expressly identified therein.

In arriving at its opinion, PJ Solomon was not authorized to solicit, and did not solicit, interest from any third party with respect to a merger or other business combination transaction involving the Company or any of its assets. The Special Committee also directed PJ Solomon, and PJ Solomon assumed for purposes of its opinion, that the Company was prevented from undertaking any transaction contemplated by the Management Liquidation Plan or any other strategic or financial alternative that was not in accordance with the Company’s organizational documents, including, without limitation, Section 2.10 of the Bylaws. PJ Solomon expressed no opinion with respect to the values that might have been obtained for the Company or its assets in any merger or business combination with any other party or in any other strategic or financial transaction, including, without limitation, any transactions contemplated by the Management Liquidation Plan.

The following summarizes the significant financial analyses performed by PJ Solomon and provided to, and reviewed with, the Special Committee and the Board of Directors on May 31, 2019, in connection with the delivery of PJ Solomon’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJ Solomon’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJ Solomon’s financial analyses. The following summary, however, does not purport to be a complete description of the financial analyses performed by PJ Solomon, nor does the order of analyses described represent relative importance or weight given to those analyses by PJ Solomon. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 30, 2019, and is not necessarily indicative of current market conditions. Certain of the financial analyses constitute or are based upon forward-looking statements. See the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 81 of this information statement.

Analysis of Selected Publicly Traded Companies

In order to assess how the public market values shares of selected publicly traded companies that PJ Solomon deemed relevant in its professional judgment, PJ Solomon reviewed and compared selected financial information concerning the Company with similar information using publicly available information of the following publicly traded companies:

 

•

The Home Depot, Inc.;

 

•

Lowe’s Companies, Inc.;

 

•

Best Buy Co., Inc.;

 

•

Bed Bath & Beyond, Inc.;

 

•

Haverty Furniture Companies, Inc.; and

 

•

Kirkland’s.

These companies are referred to herein as the “selected companies.” These companies were selected by PJ Solomon based on their respective sizes, industries, growth trajectories and geographic footprint.

 

48

PJ Solomon calculated and compared various financial multiples, including, among other things, the enterprise value of the selected companies based on closing share prices on May 30, 2019, as a multiple of: (i) the last twelve months (“LTM”) earnings before interest, taxes, depreciation and amortization, excluding non-recurring items (“EBITDA”), as calculated from publicly reported data as of May 30, 2019, and (ii) estimated EBITDA for the calendar years ending December 31, 2019 and December 31, 2020, as reported by Capital IQ as of May 30, 2019, in each case for each of the selected companies.

The tables below summarize the results of these calculations:

 

EV as a Multiple of:				Selected Companies
LTM EBITDA		Range:		0.0x – 13.2x
		Median:		5.4x
		Mean:		6.5x
2019E EBITDA		Range:		0.1x – 13.1x
		Median:		5.7x
		Mean:		6.5x
2020E EBITDA		Range:		0.1x – 12.4x
		Median:		5.5x
		Mean:		6.1x

Based on its professional judgment and after taking into consideration, among other things, the observed data for the selected companies as of May 30, 2019, PJ Solomon developed the following reference ranges of trading valuation multiples for the selected companies and applied them to the Company’s LTM EBITDA of $16 million and 2019E EBITDA of $8.5 million to calculate an implied enterprise value, implied equity value and implied equity value per share of Company Common Stock as follows:

 

EV as a Multiple of:

Reference Range of Multiples

Implied Enterprise Value (Low-High)

Net Debt (as of May 4, 2019)

Implied Equity Value

Implied Per Share Equity Value

LTM EBITDA ($16 million)

4.4x - 6.4x

$ $

70.1 million - 102.1 million

$

118.7 million

No value

No value

2019E EBITDA ($8.5 million)

4.7x - 6.7x

$ $

40.1 million - 57.0 million

$

118.7 million

No value

No value

For the purposes of the selected company analysis, PJ Solomon used those historical financial results the Company reported in its most recent public filings as of February 2, 2019, and certain financial forecasts prepared by the Company management for the fiscal year ending February 1, 2020, as described in the section below entitled “Special Factors—Unaudited Projected Financial Information of the Company—Summary of the Post-ESL Bylaw Amendment Projections” beginning on page 59 of this information statement.

Based on PJ Solomon’s professional judgment and after taking into consideration, among other things, the observed data described above, PJ Solomon’s analysis based on the range of implied per share values of the financial metrics considered by PJ Solomon reflected a valuation range for the Company Common Stock that did not reflect any equity value per share taking into account the Company’s net debt of $118.7 million as of May 4, 2019, in each case compared to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

None of the selected companies used in this analysis are identical to the Company. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the selected companies to which the Company was compared.

 

49

Analysis of Selected Precedent Transactions

To analyze the valuation of the per share Base Merger Consideration to be received by holders of shares of Company Common Stock relative to the consideration received by stockholders in other similar transactions, PJ Solomon prepared an analysis of selected precedent transactions.

Using publicly available information, PJ Solomon reviewed retail transactions that were announced over the past nine years. PJ Solomon then used its professional judgment to select the relevant transactions provided in the list below:

 

Month and Year Announced		Acquirer		Target
June 2017		Monomoy Capital Partners		West Marine, Inc.
October 2016		Sycamore Partners Management, L.P.		Staples, Inc.
November 2016		Cerberus Capital Management, L.P.		Staples, Inc. (European Operations)
October 2016		Bass Pro Group, LLC (d/b/a Bass Pro Shops)		Cabela’s Inc.
August 2016		Steinhoff International Holdings N.V.		Mattress Firm Holding Corp.
July 2016		Freeman Spogli & Co.		Batteries Plus, LLC (d/b/a Batteries Plus Bulbs)
June 2016		Bed Bath & Beyond Inc.		One Kings Lane, Inc.
April 2016		Restoration Hardware Holdings, Inc.		Design Investors WW Acquisition Company, LLC (d/b/a/ Waterworks)
February 2016		Lowe’s Companies, Inc.		RONA inc.
January 2016		KKR & Co. L.P.		Mills Fleet Farm
December 2015		Icahn Enterprises L.P.		The Pep Boys—Manny, Moe & Jack
November 2015		Mattress Firm Holding Corp.		HMK Mattress Holdings LLC
June 2015		GameStop Corp.		Geeknet, Inc.
October 2014		Brentwood Associates		Z Gallerie LLC
June 2014		Sailing Capital Overseas International Fund, LP and Sanpower Group Co., Ltd.		Brookstone Holdings Corp.
February 2014		Signet Jewelers Limited		Zale Corporation
January 2014		The Home Depot, Inc.		Global Custom Commerce Inc. (d/b/a Blinds.com)
January 2014		Freeman Spogli & Co.		Arhaus, LLC
December 2013		Bain Capital, LLC		Bob’s Discount Furniture Inc.
October 2013		Advance Auto Parts, Inc.		General Parts International, Inc.
September 2013		Jarden Corporation		Yankee Candle Investments LLC
February 2013		Office Depot Inc.		OfficeMax Inc.
November 2012		Northern Tool + Equipment Co.		The Sportsman’s Guide, Inc.
August 2012		CCMP Capital Advisors LLC		Ollie’s Holdings, Inc.
June 2012		Thomas H. Lee Partners, L.P.		Party City Holdings, Inc.
May 2012		Bed Bath & Beyond Inc.		Cost Plus, Inc.
May 2012		Madison Dearborn Partners, LLC		Things Remembered Inc.
May 2012		Golf Town USA Holdings Inc.		Golfsmith International Holdings, Inc.
September 2011		Investcorp Bank B.S.C		Sur La Table Inc.
July 2011		AEA Investors LP		Garden Ridge Corporation
May 2011		Canadian Tire Corp.		Forzani Group Ltd.
November 2010		Ares Management LLC / Freeman Spogli & Co.		Floor and Décor Outlets of America, Inc.

 

50

These transactions are referred to herein as the “selected precedent transactions.”

For each of the selected precedent transactions, PJ Solomon calculated and compared the enterprise value implied by the transaction as a multiple of the LTM EBITDA (a “EV/LTM EBITDA Multiple”) of the target company, based on amounts disclosed in public filings, company press releases and other public sources. The results of this analysis reflected a range of EV/LTM EBITDA Multiples of, where sufficient data was publicly available to calculate the multiple, 4.7x to 15.6x for the selected precedent transactions.

Based on PJ Solomon’s professional judgment and after taking into consideration, among other things, the observed data described above, PJ Solomon calculated an illustrative range of implied values per share of Company Common Stock by applying a range of EV/LTM EBITDA Multiples of 7.5x to 12.0x to the Company’s LTM EBITDA of $16 million as follows:

 

EV as a Multiple of:

Reference Range of Multiples

Implied Enterprise Value (Low-High)

Net Debt (as of May 4, 2019)

Implied Equity Value (Low- High)

Implied Per Share Equity Value Reference Range

LTM EBITDA ($16 million)

7.5x - 12.0x

$ $

120.2 million - 192.3 million

$

118.7 million

$ $

1.5 million - 73.6 million

$

0.07 - $3.24

This analysis resulted in an illustrative range of implied equity values of $0.07 to $3.24 per share of Company Common Stock, as compared to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

None of the selected precedent transactions used in this analysis are identical to the Merger. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the implied equity values or other values of the selected precedent transactions to which the $2.25 per share Base Merger Consideration was compared.

Illustrative Discounted Cash Flow Analysis

PJ Solomon performed an illustrative discounted cash flow analysis of the Company using the Company’s financial forecasts for the period beginning on May 1, 2019 through the fiscal year ending February 4, 2023 and other information and data provided by the Company’s management to calculate the present value of the estimated unlevered after-tax free cash flows projected to be generated by the Company. For purposes of its illustrative discounted cash flow analysis, PJ Solomon derived a range of implied enterprise values for the Company by adding the present values of (i) after-tax unlevered free cash flows of the Company for the period beginning on May 1, 2019 through the fiscal year ending February 4, 2023 using the Company’s financial forecasts and other information and data provided by the Company’s management and (ii) a range of terminal value multiples applied to the Company’s estimated EBITDA for the fiscal year ending February 4, 2023, which terminal value multiples PJ Solomon derived in its professional judgment based on historical trading valuation multiples for the Company and the trading valuation multiples developed by PJ Solomon in its selected companies analysis. The cash flows and terminal values were then discounted to present value as of May 30, 2019 using various discount rates ranging from 11.0% to 13.0%, which range was selected based on PJ Solomon’s professional judgment and after taking into consideration, among other things, an estimate of the weighted average cost of capital of the Company and certain other companies deemed comparable to the Company by PJ Solomon in its professional judgment.

The estimates of free cash flow for the Company for the period beginning on May 1, 2019 through the fiscal year ending February 4, 2023 were derived by PJ Solomon using the earnings before interest and taxes, or “EBIT,” set forth in the financial forecasts prepared by the Company management for the fiscal year ending February 1, 2020

 

51

and the following three fiscal years ending February 4, 2023, as described in the section below entitled “Special Factors—Unaudited Projected Financial Information of the Company—Summary of the Post-ESL Bylaw Amendment Projections” beginning on page 59 of this information statement. Using the EBIT provided in such forecasts and the Company’s projected marginal tax rate, PJ Solomon first calculated tax-effected EBIT for the remainder of 2019 and through 2022. PJ Solomon then added depreciation and amortization estimates set forth in the Company’s forecasts, and subtracted the estimated capital expenditures and changes in net working capital set forth in the Company’s forecasts. PJ Solomon then calculated a range of implied prices per share of Company Common Stock by (i) subtracting the amount of the Company’s net debt as of May 4, 2019 and (ii) dividing such amount by the fully diluted number of shares of Company Common Stock based on data and calculations provided by Company management. The following summarizes the results of these calculations:

Implied Equity Value Per Share

 

Reference Range

$0.00 - $0.87

PJ Solomon compared this range of net present values per share based on the illustrative discounted cash flow analysis to the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger.

Other

Although not a basis of PJ Solomon’s opinion, PJ Solomon reviewed for the informational purposes of the Special Committee and the Board of Directors an illustrative supplemental analysis of the historical trading prices and volumes for the Company Common Stock for the 52-week period ended May 30, 2019, the last full trading day before the announcement of the Merger Agreement, including (i) the closing price per share of Company Common Stock as of May 30, 2019, (ii) the closing price per share of Company Common Stock on April 5, 2019, the last full trading day before Transform submitted its indication of interest to acquire the Company on April 6, 2019, (iii) the highest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019, (iv) the lowest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019, (v) the 30-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019, (vi) the 60-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019, and (vii) the 90-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019.

This illustrative analysis indicated that the price per share of Company Common Stock to be paid to holders of shares of Company Common Stock pursuant to the Merger Agreement represented:

 

•

a premium of 2.3% based on the closing price per share of Company Common Stock as of May 30, 2019 of $2.20;

 

•

a premium of 18.4% based on the closing price per share of Company Common Stock as of April 5, 2019 of $1.90;

 

•

a discount of 32.8% based on the closing price per share of Company Common Stock as of September 21, 2018 of $3.35, which was the highest closing price for the 52-week period ended May 30, 2019;

 

•

a premium of 42.4% based on the closing price per share of Company Common Stock as of December 27, 2018 of $1.58, which was the lowest closing price for the 52-week period ended May 30, 2019;

 

•

a premium of 10.3% based on the 30-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.04;

 

52

•

a premium of 4.7% based on the 60-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.15; and

 

•

a premium of 6.1% based on the 90-calendar-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.12.

PJ Solomon also analyzed, for the informational purposes of the Special Committee and the Board of Directors and not as a basis of PJ Solomon’s opinion, the enterprise value (which represents the equity value plus book values of total debt, less cash) (“EV”) calculated based on the closing price per share of Company Common Stock as of April 5, 2019. This analysis indicated that the EV of $169.4 million, calculated based on the $2.25 per share Base Merger Consideration to be received by holders of shares of Company Common Stock in connection with the Merger, represented a premium of 4.9% to the EV of $161.5 million based on the closing price per share of Company Common Stock as of April 5, 2019. The historical trading analysis and the enterprise value analysis are supplementary only and were furnished to the Special Committee and the Board of Directors for informational purposes. PJ Solomon did not explicitly estimate the value of the Company Common Stock based on the historical trading analysis or enterprise value analysis and they were not part of PJ Solomon’s financial analyses that support its opinion.

In addition, PJ Solomon also performed, for the informational purposes of the Special Committee and the Board of Directors and not as a basis of PJ Solomon’s opinion, an illustrative supplemental analysis of the premiums paid by acquirers over the public market trading prices in merger and acquisition transactions involving a change of control of the target. The transactions analyzed by PJ Solomon included transactions announced after March 2016 involving target companies with businesses deemed relevant by PJ Solomon.

PJ Solomon performed premiums paid analyses on 100 transactions that it deemed relevant. PJ Solomon calculated, for this period, the premia represented by the prices per share paid in these transactions relative to the target companies’ closing prices per share (a) one day and (b) 30 days prior to announcement (which represented undisturbed trading prices to the extent publicly available and applicable). The overall low to high acquisition premia observed for these transactions were –24.7% to 1,292.3% (with a median of 31.2%) for the one-day premia and –43.6% to 992.5% (with a median of 33.2%) for the 30-day premia.

No transaction utilized in the premiums paid analysis is identical to the Company or to the Merger. In evaluating the precedent transactions, PJ Solomon made judgments and assumptions with regard to industry performance, general business, market and financial conditions and other matters, which are beyond the control of the Company, such as the impact of competition on the business of the Company or the industry generally, industry growth and the absence of any material adverse change in the financial condition of the Company or the industry or in the financial markets in general, which could affect the enterprise value of the transactions to which they are being compared. Mathematical analysis (such as determining the mean) is not in itself a meaningful method of using premiums paid data. The premiums paid analysis is supplementary only and was furnished to the Special Committee for informational purposes. PJ Solomon did not explicitly estimate the value of Company Common Stock based on the premiums paid analysis and it was not part of PJ Solomon’s financial analyses that support its opinion.

Miscellaneous

In arriving at PJ Solomon’s opinion, PJ Solomon performed a variety of financial analyses, including the significant financial analyses summarized above. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, PJ Solomon did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to significance and relevance of each analysis and factor. In addition, PJ Solomon may have given various analyses

 

53

and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be PJ Solomon’s view of the Company’s actual value. Accordingly, PJ Solomon believes that its analysis must be considered as a whole and that selecting portions of its analysis, without considering all such analyses, could create an incomplete view of the process underlying PJ Solomon’s opinion.

In performing its analyses, PJ Solomon relied on numerous assumptions made by the management of the Company and made judgments of its own with regard to current and future industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. Actual values will depend upon several factors, including changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The analyses performed by PJ Solomon are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of PJ Solomon’s analysis of the fairness from a financial point of view of the Base Merger Consideration proposed to be paid to the holders of shares of Company Common Stock in connection with the Merger and were provided to the Special Committee and the Board of Directors in connection with the delivery of PJ Solomon’s opinion. The analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold, which are inherently subject to uncertainty. Because such analyses are inherently subject to uncertainty, neither the Company nor PJ Solomon, nor any other person, can guarantee that future results or actual values of the Company will not differ materially from those indicated in PJ Solomon’s analyses. With regard to the comparable public company analysis and the precedent transactions analysis summarized above, PJ Solomon selected comparable public companies and precedent transactions on the basis of various factors for reference purposes only; however, no public company or transaction utilized as a comparison is fully comparable to the Company or the Merger. Accordingly, an analysis of the foregoing was not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the acquisition or public trading value of the comparable companies and transactions to which the Company and the Merger were being compared.

The per share Base Merger Consideration was determined through negotiations between the Special Committee and Transform, and was recommended by the Special Committee and approved by the Board of Directors. PJ Solomon did not recommend any specific consideration to the Special Committee or the Board of Directors or that any given consideration constituted the only appropriate consideration for the Merger. The decision to enter into the Merger Agreement was solely that of the Special Committee and the Board of Directors. As described above, PJ Solomon’s opinion and analyses were only one of many factors considered by the Special Committee and the Board of Directors in their evaluation of the Merger and should not be viewed as determinative of the views of the Special Committee, the Board of Directors or the Company’s management with respect to the Merger or per share Base Merger Consideration. The issuance of PJ Solomon’s opinion was authorized by PJ Solomon’s fairness opinion committee.

In the past PJ Solomon or its affiliates have provided, currently are providing, and in the future may provide, investment banking and other financial services to the Company, and have received or in the future may receive compensation for the rendering of these services, including services in connection with a potential repurchase of a portion of the Company’s outstanding shares of Company Common Stock or the taking of other actions to maximize shareholder value, and has received compensation for rendering these services. During the two years preceding the date of PJ Solomon’s written opinion, PJ Solomon received or derived, directly or indirectly, approximately $133,000 in the aggregate from the Company for prior strategic advisory services to the Special Committee. Prior to the date of PJ Solomon’s written opinion, PJ Solomon also received the $500,000 in monthly advisory fees described below for services rendered to the Special Committee in connection with the Merger. During the two years preceding the date of PJ Solomon’s written opinion, PJ Solomon had not been engaged by

 

54

or received any compensation from ESL, Transform, or their respective affiliates, or, in the case of ESL, its portfolio companies.

Natixis, S.A. (“Natixis”), which holds a majority of the outstanding equity of PJ Solomon, is, together with its affiliates, engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management, insurance and other financial and non-financial activities and services for various persons and entities. Natixis and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of the Company, Transform, any of their respective affiliates and third parties, including ESL and its affiliates and portfolio companies, or any currency or commodity that may be involved in the Merger.

Under the terms of PJ Solomon’s engagement letter, dated November 13, 2018, as amended on April 4, 2019 and May 28, 2019, the Company has agreed to pay PJ Solomon for its services in connection with the Merger an aggregate fee of $2.0 million, not including any fees that PJ Solomon may earn as a result of the Outlet Sale Process, $500,000 of which has been paid on a monthly basis as an advisory fee, $500,000 of which was payable upon delivery of its opinion and the remainder of which is contingent upon the completion of the Merger. PJ Solomon is also acting as financial advisor to the Special Committee in connection with the Outlet Sale Process and may earn additional fees as a result of the Outlet Sale Process, which fees would be calculated, in the event an Outlet Sale is consummated that satisfies the criteria set forth in the Merger Agreement, based on the value of the aggregate consideration payable by the buyer of the Outlet Segment in the Outlet Sale and would exceed the aggregate fee of $2.0 million payable in connection with the Merger. The Company has also agreed to reimburse PJ Solomon for certain reasonable and out-of-pocket expenses incurred in connection with PJ Solomon’s engagement, and to indemnify PJ Solomon, its affiliates, and its and their respective directors, officers, members, partners, controlling persons, agents and employees against specified liabilities.

Position of the Company on the Fairness of the Merger

Under the SEC rules governing “going private” transactions (the “Going Private Rules”), the Company is required to express its belief as to the substantive and procedural fairness of the Merger to the Company’s “unaffiliated security holders”, as defined under Rule 13e-3 of the Exchange Act (the “Unaffiliated Stockholders”). The Company is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The Merger is not structured so that approval of a majority of Unaffiliated Stockholders is required and, since the sole member of the Special Committee is an independent and disinterested non-employee director, no unaffiliated representative was retained by or on behalf of the Company to act solely on behalf of the Unaffiliated Stockholders. However, the Company believes that the Merger is fair to the Unaffiliated Stockholders based on:

 

•

the fact that an active and engaged Special Committee composed of an independent and disinterested member of the Board of Directors who did not have a material interest in the potential transaction, determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);

 

•

the analyses and conclusions of the Special Committee, including the factors described in the section above entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 40 of this information statement in reaching that determination;

 

•

the analyses and conclusions of the Board of Directors, including the factors described in the section above entitled “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 44 of this information statement and the Board of Directors’ unanimous determination that, among other things, the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL); and

 

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•

the financial analyses and opinion of PJ Solomon to the effect that, as of May 31, 2019, and based on and subject to various assumptions and limitations described in its opinion, the $2.25 per share in cash of Base Merger Consideration to be paid to the holders of shares of Company Common Stock (other than ESL or Transform) pursuant to the Merger Agreement was fair from a financial point of view to such holders, as described in the section above entitled “Special Factors—Opinion of PJ Solomon” beginning on page 45 of this information statement.

As described above in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 40 of this information statement the Special Committee considered a number of factors and analyses in its evaluation of the Merger, including the opinion and financial analyses of PJ Solomon as described above in the section entitled “Special Factors—Opinion of PJ Solomon” beginning on page 45 of this information statement, and the value of the Merger Consideration in relation to current and historical market prices of Company Common Stock and in relation the Company’s net book value. In forming its belief, the Company did not consider the liquidation value of the Company given the requirements set forth in the ESL Bylaw Amendment that would need to be complied with in order to effect a liquidation. As described above in the section entitled “Special Factors—Background of the Transaction” beginning on page 19 of this information statement, the Company was considering a liquidation of Company’s Sears Hometown segment, excluding the Buddy’s Home Furnishing Stores (the “Hometown Segment”), as well as its impact on the Company’s value, but determined that proceeding with such a liquidation following the ESL Bylaw Amendment would require the Board of Directors to first comply with the requirements set forth in the ESL Bylaw Amendment, which would require a 30 business day period to elapse between the public announcement of the Board of Directors’ recommendation to liquidate the Hometown Segment and the actual commencement of the liquidation and therefore impose significant execution risk to the successful implementation and completion of the liquidation. The Company also did not consider firm offers made by unaffiliated persons during the last two years, as no such offers were made during that time.

The foregoing information and factors considered and given weight by the Company in reaching its position on the fairness of the Merger include the material factors considered by the Company but are not intended to be exhaustive. The Company did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching its position as to the fairness of the Merger. The Company made its determination after considering all of the foregoing as a whole. The Company believes these factors provide a reasonable basis upon which to form its belief that the Merger is fair to the Unaffiliated Stockholders. This belief should not, however, be construed as a recommendation to any Unaffiliated Stockholder as to whether they should, and the Company is not making any recommendation as to whether any Unaffiliated Stockholder should, exercise their appraisal rights under the DGCL.

Unaudited Projected Financial Information of the Company

The Company does not, on a routine basis, publicly disclose long-term projections as to future financial performance due to, among other reasons, the unpredictability of the underlying assumptions and estimates. However, the Company’s senior management provided certain non-public, unaudited prospective financial information (as described more fully below in the sections entitled “Summary of the Pre-ESL Bylaw Amendment Projections” and “Summary of the Post-ESL Bylaw Amendment Projections” beginning on pages 58 and 59, respectively, of this information statement) prepared by it to PJ Solomon in connection with its financial analyses. Certain information substantially similar to that contained in the Pre-ESL Bylaw Amendment Projections (as defined below) and the Post-ESL Bylaw Amendment Projections (as defined below) was also made available to Transform and its representatives in connection with its evaluation of potential transactions with the Company and pursuant to the Company’s obligations under the financing cooperation covenants in the Merger Agreement (as described more fully below in the sections entitled “Summary of the Transform Projections” and “Summary of the June 2019 Projections” beginning on pages 59 and 60, respectively, of this information statement). The projections summarized in this section are generally referred to as the “projections”.

 

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The projections were not prepared with a view to public disclosure and are included in this information statement only because such information was made available to PJ Solomon and Transform as described above. The projections were not prepared with a view to compliance with generally accepted accounting principles as applied in the United States (which we refer to as “GAAP”), the published guidelines of the SEC regarding projections and forward-looking statements or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The prospective financial information included in this information statement has been prepared by, and is the responsibility of, the Company’s senior management, and is subjective in many respects. The projections were, in the view of the Company’s senior management, prepared on a reasonable basis, reflected the best available estimates and judgments at the time of preparation, and presented as of the time of preparation, to the best of senior management’s knowledge and belief, the expected course of action and the expected future financial performance of the Company on a standalone basis, subject to the assumptions and limitations described in this section. Furthermore, neither the Company’s independent auditors nor any other independent accountants have audited, reviewed, examined, compiled or applied agreed-upon procedures with respect to the accompanying prospective financial information and, accordingly, assume no responsibility for, and express no opinion or other form of assurance on, such information or its achievability.

The projections are forward-looking statements. Although summaries of the projections are presented with numerical specificity, the projections reflect numerous assumptions and estimates as to future events made by the Company’s senior management, which they believe were reasonable at the time the projections were prepared, taking into account the relevant information available to management at such time. However, this information is not fact and should not be relied upon as being necessarily predictive of actual future results. Important factors may affect actual results and cause the forecasts not to be achieved. These factors include general economic conditions, accuracy of certain accounting assumptions, timing of business investments by the Company, changes in actual or projected cash flows, competitive pressures, changes in tax or other laws or regulations, and the other factors described in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 81 of this information statement, the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and any subsequent Quarterly Reports on Form 10-Q, and the information referenced in the section entitled “Where You Can Find Additional Information” beginning on page 125 of this information statement. Generally, the further out the period to which the projections relate, the less predictable and more unreliable the information becomes. In addition, the projections do not take into account any circumstances or events occurring after the date that the projections were prepared. Furthermore, except in the case of the June 2019 Projections (as described more fully below in the section entitled “Summary of the June 2019 Projections” beginning on page 60 of this information statement), the projections were prepared on a standalone basis without giving effect to the Merger, including the impact of negotiating or executing the Merger Agreement, the expenses that may be incurred in connection with consummating the Merger, including the expenses payable pursuant to the Merger Agreement, the potential synergies that may be achieved as a result of the Merger, or the effect of any business or strategic decision or action that has been or will be taken as a result of the Merger Agreement. As a result, there can be no assurance that the projections will be realized, and actual results may be materially better or worse than those contained in the projections. The inclusion of this information in this information statement should not be regarded as an indication that the Company’s senior management, the Special Committee, the Board of Directors, PJ Solomon, Transform or any other recipient of this information considered, or now considers, the projections to be material information of the Company, or necessarily predictive of actual future results, nor should it be construed as financial guidance, and it should not be relied upon as such. The summary of the projections is not included in this information statement in order to influence any stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to the shares of Company Common Stock.

The projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC. The Post-ESL Bylaw Amendment Projections were reviewed by the Company’s senior management with, and considered by, the Special Committee and the Board of Directors in connection with their evaluation and approval of the Merger

 

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and were relied upon by PJ Solomon for purposes of its financial analyses and opinion, as described more fully in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on page 40 of this information statement, “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on page 44 of this information statement and “Special Factors—Opinion of PJ Solomon” beginning on page 45 of this information statement.

Except to the extent required by applicable federal securities laws, we do not intend, and expressly disclaim any responsibility to update or otherwise revise the forecasts to reflect circumstances existing after the date when we prepared the projections or to reflect the occurrence of future events or changes in general economic or industry conditions, even in the event that any of the assumptions underlying the projections are shown to be in error. We can give no assurance that, had our projections been prepared either as of the date of the Merger Agreement or as of the date of this information statement, similar estimates and assumptions would be used. Neither the Company nor any of its affiliates, directors, officers, advisors or other representatives has made or makes any representation to any of our stockholders or any other person regarding the ultimate performance of the Company compared to the information contained in our projections or that our projections will be achieved.

In light of the foregoing factors and the uncertainties inherent in the projections, stockholders are cautioned not to rely on the projections included in this information statement.

Certain of the measures included in the projections may be considered non-GAAP financial measures. These non-GAAP financial measures are useful to investors and management in understanding current profitability levels and liquidity that may serve as a basis for evaluating future performance and facilitating comparability of results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies. The non-GAAP financial measures used in the projections were relied upon by PJ Solomon for purposes of its financial analyses and, in the case of the Post-ESL Bylaw Amendment Projections, its opinion.

Summary of the Pre-ESL Bylaw Amendment Projections

Subject to the foregoing qualifications, the following is a summary of the projections (the “Pre-ESL Bylaw Amendment Projections”) prepared by senior management of the Company prior to the ESL Bylaw Amendment to reflect a liquidation of the Hometown Segment and continued operation of the Outlet Segment by the Company and provided to PS Solomon for the three fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021:

 

		Pro-Forma Hometown Segment Liquidation				Pro-Forma Outlet Segment Only
($ in millions)		2019				2020				2021
Net Sales			716.3				476.6				478.8
EBITDA(1)			(37.3	)			26.3				27.1
EBIT(2)			(56.4	)			21.8	(4)			22.3
Net Income			(65.4	)			19.7	(5)			21.2
Adjusted EBITDA(3) (4)			29.3				26.3	(6)			27.1
Cash			4.3				4.4				16.3
Total Debt			18.7				6.2				—
Capital Expenditures			(1.5	)			(5.6	)			(5.6	)
Change in Net Working Capital			(148.5	)			6.0				2.3

 

(1)	EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)	EBIT is net (loss) income from continuing operations adjusted for interest and taxes.

 

58

(3)	Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(4)	Adjusted EBITDA was referred to as “Pro Forma EBITDA” in the Pre-ESL Bylaw Amendment Projections.

Summary of the Transform Projections

Certain information substantially similar to that contained in the Pre-ESL Bylaw Amendment Projections was also provided or made available to Transform on April 1, 2019 (“Version 1”) and on April 11, 2019 (“Version 2” and, together with Version 1, the “Transform Projections”) to reflect a liquidation of the Hometown Segment and continued operation of the Outlet Segment for the fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021. The Transform Projections can be summarized as follows:

 

		Version 1								Version 2
($ in millions)		2019				2020				2020				2021
Net Sales			NP	(3)			515.2				476.6	(4)			480.0
EBITDA(1)			NP				26.3				26.3				26.8
Adjusted EBITDA(2)			NP				26.3				26.3				26.8
Net Income			NP				20.2				19.6				20.9
Cash			4.3				4.3				NP				NP
Debt			18.7				2.7				NP				NP

 

(1)	EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)	Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(3)	“NP” is used here to note that a particular line item was not included in the applicable projections.

(4)

The $38.6 million difference in 2020 Net Sales between Version 1 and Version 2 is primarily due to an external presentation of sales in Version 1 compared to an internal presentation of sales in Version 2. Internal sales only include merchandise sales. External sales also include non-merchandise revenues for items such as protection agreements and delivery. The gross margins on these non-merchandise revenues are included in both versions of the Transform Projections resulting in similar Adjusted EBITDA.

Summary of the Post-ESL Bylaw Amendment Projections

Subject to the foregoing qualifications, the following is a summary of the projections (the “Post-ESL Bylaw Amendment Projections”) prepared by senior management of the Company following the ESL Bylaw Amendment and provided to PJ Solomon prior to the execution of the Merger Agreement for the four fiscal years ending January 31, 2019, January 31, 2020, January 31, 2021 and January 31, 2022, representing the continued operation of the Company’s Outlet Segment and Hometown Segment:

 

($ in millions)		2019				2020				2021				2022
Net Sales			1,087.1				960.6				849.3				746.8
Adjusted EBITDA(1)			8.5				11.1				13.1				14.6
EBIT(2)			(15.9	)			(3.9	)			1.0				3.1
Net Income			(29.5	)			(14.7	)			(8.7	)			(5.7	)
Cash			8.6				9.9				8.8				7.8
Total Debt			116.9				104.2				92.3				78.6
Capital Expenditures			(6.7	)			(5.7	)			(5.5	)			(5.2	)
Change in Net Working Capital			(22.2	)			(24.8	)			(17.0	)			(16.2	)

 

(1)	Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(2)	EBIT is net (loss) income from continuing operations adjusted for interest and taxes.

 

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Summary of the June 2019 Projections

In connection with the Company’s obligations under the financing cooperation covenants in the Merger Agreement, Transform requested and the Company provided certain updated projected financial information from the Company in June 2019 after execution of the Merger Agreement. Subject to the foregoing qualifications, the following is a summary of the projections (the “June 2019 Projections”) prepared by senior management of the Company pursuant to such request for the three fiscal years ending January 31, 2019, January 31, 2020 and January 31, 2021, representing the continued operation of the Company’s Outlet Segment and Hometown Segment:

 

($ in millions)		2019				2020				2021
Sales			1,049.6				939.6				855.6
Gross Margin			338.3				326.7				311.6
EBITDA(1)			(11.9	)			22.2				24.3
Adjusted EBITDA(2)			9.1				23.5	(3)			25.5	(4)
Net Income			(34.5	)			3.0				7.3
Cash			8.6				8.0				7.7
Debt			100.6				79.4				57.1

 

(1)	EBITDA is net (loss) income from continuing operations adjusted for interest, taxes, depreciation and amortization.

(2)	Adjusted EBITDA is EBITDA adjusted to exclude certain significant items, including information technology transformation investments and the accelerated closure of underperforming stores.

(3)

The difference in 2020 Adjusted EBITDA between the Post-ESL Bylaw Amendment Projections and the June 2019 Projections was due in part to the following changes in assumptions: a $5.3 million reduction in corporate overhead resulting from the Company no longer being a public reporting company; the expected receipt of $3.3 million in additional cash discounts from Transform following announcement of the Merger; and $3.4 million in freight and service provider savings identified based on requests for proposals received following execution of the Merger Agreement.

(4)

The difference in 2021 Adjusted EBITDA between the Post-ESL Bylaw Amendment Projections and the June 2019 Projections was due in part to the following changes in assumptions: a $5.3 million reduction in corporate overhead resulting from the Company no longer being a public reporting company; the expected receipt of $3.5 million in additional cash discounts from Transform following announcement of the Merger; and $3.5 million in freight and service provider savings identified based on requests for proposals received following execution of the Merger Agreement.

Position of ESL on the Fairness of the Merger

Under the Going Private Rules, each of Edward S. Lampert, ESL Partners, L.P. (“Partners”), RBS Partners, L.P. (“RBS”), ESL Investments, Inc. (“ESL Investments”), Merger Subsidiary and Transform (together the “ESL Filing Parties”) is an affiliate of the Company and, therefore, is required to express its belief as to the substantive and procedural fairness of the Merger to the Unaffiliated Stockholders. Each of the ESL Filing Parties is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The ESL Filing Parties believe that the Merger is fair to the Unaffiliated Stockholders on the basis of the factors described in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation,” “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” and “Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 40, 44 and 55, respectively, of this information statement, which factors, other than any factors to the extent related to the Special Committee’s and Board of Directors’ belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment as an independent, standalone public company constituted the best strategic alternative for the Company and its stockholders or that the ESL

 

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Bylaw Amendment resulted in a reduction in the standalone value of the Company, which factors the ESL Filing Parties disagree with, the ESL Filing Parties agree with and adopt, and the additional factors described below.

The ESL Filing Parties also believe that the interests of the Unaffiliated Stockholders were represented by the Special Committee, which negotiated the terms and conditions of the Merger Agreement on behalf of the Unaffiliated Stockholders with the assistance of its independent legal and financial advisors. None of the ESL Filing Parties participated in the deliberations of the Special Committee regarding, or received advice from the Special Committee’s independent legal or financial advisors as to, the substantive or procedural fairness of the Merger. The ESL Filing Parties have not performed, or engaged a financial advisor to perform, any valuation or other analysis for the purpose of assessing the fairness of the Merger to the Unaffiliated Stockholders. No ESL Filing Party received any report, opinion or appraisal from any outside party materially related to the Merger, including any report, opinion or appraisal relating to the fairness of the Merger Consideration to the Unaffiliated Stockholders or to the ESL Filing Parties.

Based on the ESL Filing Parties’ knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and findings of, the Board of Directors and the Special Committee described in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation,” “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” and “Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 40, 44 and 55, respectively, of this information statement (which findings, other than any findings to the extent related to the Special Committee’s and Board of Directors’ belief that a liquidation of the Company’s Hometown Segment and continued operation of the Company’s Outlet Segment as an independent, standalone public company constituted the best strategic alternative for the Company and its stockholders or that the ESL Bylaw Amendment resulted in a reduction in the standalone value of the Company, which findings the ESL Filing Parties disagree with, the ESL Filing Parties agree with and adopt), the ESL Filing Parties believe that the Merger is substantively fair to the Unaffiliated Stockholders. In particular, the ESL Filing Parties considered the following:

 

•

the fact that the Board of Directors determined, after careful consideration and acknowledging the interest of ESL in the Merger, by the unanimous vote of all members of the Board of Directors, based in part on the recommendation of the Special Committee, that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Company and its stockholders (other than ESL);

 

•

the fact that the Base Merger Consideration of $2.25 per share of Company Common Stock represents a premium of approximately 23.6% to the volume weighed average price of the Company Common Stock for the five trading days through April 5, 2019, the last trading day prior to ESL making a proposal to acquire all of the outstanding Company Common Stock not already owned by ESL;

 

•

the fact that by making a public offer contemplating merger consideration of $2.25 per share, ESL effectively created a market for the Company that would have allowed a third party that believed the Company was undervalued at this price to make a bid at a higher valuation, yet no third party did so;

 

•

the fact that the Board of Directors was seriously considering the possibility of liquidating the Hometown Segment prior to adoption of the ESL Bylaw Amendment, which liquidation the ESL Filing Parties believe would have significantly diminished the Company’s value and prospects and created significant risks should the recent operational profit improvements of the Company’s Outlet Segment prove ephemeral;

 

•

the fact that the ESL Filing Parties do not believe the Company was likely to realize the value from a liquidation of the Hometown Segment contemplated to be realized in the Transform Projections and believe the Merger provides greater value for the Hometown Segment than the Company would have been likely to realize through a liquidation of that business;

 

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•

the ESL Filing Parties’ belief that the Merger Agreement permits the Company to obtain the highest value available for the Outlet Segment through an Outlet Sale and the fact that, if an Outlet Sale is consummated prior to the closing of the Merger, the Company’s Unaffiliated Stockholders will receive their pro rata share of any Net Proceeds of the Outlet Sale in excess of $97,500,000;

 

•

the fact that the consideration to be paid in the Merger is all cash, providing the Unaffiliated Stockholders with certainty of value and liquidity for their Company Common Stock, eliminating any uncertainty in valuing the consideration to be received by such stockholders and allowing such stockholders to avoid exposure to the risks and uncertainties relating to the prospects of the Company;

 

•

the ESL Filing Parties’ view that there are no unusual requirements or conditions to the Merger, and the fact that ESL Investments entered into a commitment letter pursuant to which it committed, subject to the terms and conditions set forth therein, to contribute approximately $21,000,000 to Transform to be used by Transform to pay the Merger Consideration, each increasing the likelihood that the Merger will be consummated and that the Merger Consideration to be paid to the Unaffiliated Stockholders in the Merger will be received; and

 

•

the fact that the transaction will provide value to Unaffiliated Stockholders in excess of the ESL Filing Parties’ calculation of the Company’s historic trading price to book value ratio (which the ESL Filing Parties’ calculated to be approximately 12% to 45% over the four fiscal years ending February 2, 2019) based on the ESL Filing Parties’ calculation of the Merger Consideration to book value ratio of approximately 48% measuring the Company’s book value per share as of May 4, 2019.

Other than in connection with evaluating the potential impact of a liquidation of the Company’s Hometown Segment, the ESL Filing Parties did not consider liquidation value as a factor because they consider the Company to be a viable going concern business and the trading history of the Company Common Stock to generally be an indication of its value as such and they have no present intention to liquidate the Company.

The ESL Filing Parties believe that the Merger is procedurally fair to the Unaffiliated Stockholders based upon the following:

 

•

other than their receipt of board and Special Committee fees (which are not contingent upon the consummation of the Merger or the Special Committee’s or the Board of Directors’ recommendation or approval of the Merger) and their interests described in the section entitled “Special Factors—Interests of Directors and Executive Officers in the Merger” beginning on page 70 of this information statement, no member of the Special Committee or the Board of Directors has a financial interest in the Merger that is different from, or in addition to, the interests of the Unaffiliated Stockholders generally, although the Merger Agreement does include customary provisions for the right to continued indemnification and directors’ and officers’ liability insurance for the Company’s directors and officers by the surviving corporation for events occurring prior to the effective time of the Merger;

 

•

the interests of the Company’s Unaffiliated Stockholder were represented by the Special Committee, currently consisting solely of a director who is not an officer or employee of the Company and who is not affiliated with the ESL Filing Parties, and the Special Committee was given exclusive authority, among other things, to review, consider, evaluate, negotiate, reject or recommend or not recommend to the Board of Directors a potential negotiated transaction involving the Company and Transform, or any alternative potential transactions;

 

•

the Special Committee retained its own independent legal and financial advisors;

 

•

the Special Committee was deliberate in its process, concluding that a transaction on the terms contemplated by Transform’s April 5, 2019 proposal would not have been in the best interests of the Unaffiliated Stockholders and communicating that conclusion to representatives of Transform, and subsequently extensively negotiating the terms of the Merger Agreement with Transform, including negotiating for the right of the Company to have the opportunity to pursue the Outlet Sale prior to the

 

62

consummation of the Merger and the Merger Consideration to be subject to an upward adjustment in the event that an Outlet Sale that satisfies certain criteria specified in the Merger Agreement is completed prior to the closing of the Merger;

 

•

the Special Committee and the Board of Directors received the opinion of PJ Solomon to the effect that, and based upon and subject to the factors and assumptions and limitations set forth therein, as of May 31, 2019, the Base Merger Consideration to be paid to the Unaffiliated Stockholders pursuant to the Merger Agreement is fair from a financial point of view to such holders;

 

•

the Company’s entry into the Merger Agreement was approved by the unanimous vote of the Board of Directors, after careful consideration and acknowledging the interest of ESL in the Merger, based in part on the recommendation of the Special Committee; and

 

•

the fact that appraisal rights are available to the Unaffiliated Stockholder who comply with all of the required procedures under the DGCL for exercising appraisal rights, which allows such stockholders to seek appraisal of the “fair value” of their Company Common Stock in lieu of receiving the Merger Consideration.

The foregoing discussion of the information and factors considered and given weight by the ESL Filing Parties in connection with the fairness of the Merger is not intended to be exhaustive but is believed to include the material factors considered by them. The ESL Filing Parties did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the Merger. Rather, the ESL Filing Parties made the fairness determinations after considering all of the foregoing as a whole. The ESL Filing Parties believe these factors provide a reasonable basis upon which to form their belief that the Merger is fair to the Unaffiliated Stockholders. This belief should not, however, be construed as a recommendation to any Unaffiliated Stockholder as to whether they should, and the ESL Filing Parties do not make any recommendation as to whether any Unaffiliated Stockholder should, exercise their appraisal rights under the DGCL.

Purposes and Reasons of the Company in Connection With the Merger

Under the Going Private Rules, the Company is required to express to the Unaffiliated Stockholders its purposes and reasons for entering into a “going private” transaction as well as the reasons for the structure of such transaction and benefits and detriments of such transaction to the Company, its affiliates and the Unaffiliated Stockholders. The Company is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The Company’s purpose for engaging in the Merger is to provide certain value and liquidity to the Unaffiliated Stockholders in the form of the Merger Consideration which, if equal to the Base Merger Consideration of $2.25 per share of Company Common Stock, will represent a premium of 2.3% to the closing price per share of Company Common Stock as of May 30, 2019 of $2.20, a premium of 18.4% to the closing price per share of Company Common Stock as of April 5, 2019 (the last trading day prior to the Company’s announcement that it had received a proposal from Transform to acquire the Company) of $1.90, a discount of 32.8% to the closing price per share of Company Common Stock as of September 21, 2018 of $3.35 (the highest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019), a premium of 42.4% to the closing price per share of Company Common Stock as of December 27, 2018 of $1.58 (the lowest closing price per share of Company Common Stock for the 52-week period ended May 30, 2019), a premium of 10.3% to the 30-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.04, a premium of 4.7% to the 60-day volume weighted average price share of Company Common Stock for the period ended May 30, 2019 of $2.15 and a premium of 6.1% to the 90-day volume weighted average price per share of Company Common Stock for the period ended May 30, 2019 of $2.12. In addition, the Base Merger Consideration of $2.25 per share of Company Common Stock will be increased if an Outlet Sale satisfying the criteria specified in the Merger Agreement is completed prior to the closing of the Merger and such Outlet Sale results in Net Proceeds in excess of $97,500,000.

 

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The Company has determined to engage in the Merger based on the conclusions, determinations and reasons of the Special Committee, the Board of Directors and the Company as described in detail above in the sections entitled “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation”, “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” and “Special Factors—Position of the Company on the Fairness of the Merger” beginning on pages 40, 44 and 55, respectively, of this information statement. In addition, the Company believes that structuring the transaction as a one-step merger transaction that has been approved by the Principal Stockholders by the Written Consent will provide certain timing and deal certainty advantages to allow the Unaffiliated Stockholders to receive cash for their Company Common Stock in the form of the Merger Consideration.

Purposes and Reasons of the ESL Filing Parties in Connection With the Merger

Under the Going Private Rules, each of the ESL Filing Parties is an affiliate of the Company and, therefore, is required to express to the Unaffiliated Stockholders their purposes and reasons for entering into a “going private” transaction as well as the reasons for the structure of such transaction and benefits and detriments of such transaction to the Company, its affiliates and the Unaffiliated Stockholders. Each of the ESL Filing Parties is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

Purposes of and Reasons for the Merger

For the ESL Filing Parties, the purpose of the Merger is to reunite Sears and Kmart, which Transform operates through its subsidiaries, with the Company, which was spun off from Sears Holdings Corporation, the former parent company of Sears and Kmart, in 2012. Having these businesses under common ownership will accelerate Transform’s strategy of growing its smaller store format by adding Sears Hometown stores. It will also expand Transform’s footprint as a multi-channel business that can serve customers through a variety of shopping experiences to meet their needs, provide growth for Transform’s marquee brands, including KENMORE^® and DIEHARD^®, and increase opportunities for Sears Home Services and Financial Services businesses, as well as the Shop Your Way^® social shopping destination and rewards program. The ESL Filing Parties also believe the Merger will provide certain value and liquidity to the Unaffiliated Stockholders, as well as a considerable premium to the market price of the Company Common Stock prior to the Company’s announcement that it had received an acquisition proposal from Transform, and will also provide the Unaffiliated Stockholders with an overall outcome that is superior to either the continuation of the Company as a standalone basis or the liquidation of the Hometown Segment, which was contemplated by the Board of Directors prior to the ESL Bylaw Amendment (see the section entitled “Special Factors—Background of the Transaction” beginning on page 19 of this information statement). In addition, by delisting the Company Common Stock from the NASDAQ and de-registering the Company Common Stock under the Exchange Act, the Company will be relieved of many of the burdens and constraints imposed on public companies. Most importantly, the Company and its management will be able to focus on long-term operational and growth objectives, rather than meeting the short-term results expectations of the public equity markets and the investment community. In addition, the Company will no longer have the competitive disadvantage of being obligated to publicly disclose its business strategies. Moreover, by eliminating publicly held equity, the Company will be able to reduce its regulatory and compliance costs and expenses.

Reasons for the Structure of the Merger

The ESL Filing Parties believe that structuring the transaction as a one-step merger transaction is preferable to other transaction structures because (i) it will enable Transform to acquire all of the outstanding Company Common Stock held by the Unaffiliated Stockholders at the same time and (ii) it represents an opportunity for the Unaffiliated Stockholders to receive cash for their shares of Company Common Stock in the form of the Merger Consideration. Additionally, the Principal Stockholders own a sufficient number of shares of Company Common Stock to have approved the Merger Agreement and the Merger on behalf of the holders of shares of

 

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Company Common Stock by executing the Written Consent without the need to solicit the approval of the Unaffiliated Stockholders, which provides greater deal certainty. Further, the ESL Filing Parties believe that structuring the transaction as a tender offer followed by a second-step merger transaction would not provide any timing or other benefits given the Company’s pursuit of the Outlet Sale prior to the consummation of the Merger. In addition, the ESL Filing Parties did not ultimately pursue an acquisition of the assets of the Company’s Hometown Segment by Transform as the ESL Filing Parties believed that the continued operation of the Company as a public company owning only the Outlet Segment to be risky, based on the scale of the Outlet Segment, the cost structure of the remaining company and fluctuations in the operating performance that the Outlet Segment had experienced over its history.

Plans for the Company in Connection with the Merger

Under the Going Private Rules, the Company and the ESL Filing Parties are also required to disclose to the Unaffiliated Stockholders any plans, proposals or negotiations that relate to or would result in the occurrence of certain events in connection the “going private” transaction, including extraordinary transactions, sales of material amounts of the assets of the Company, material changes to dividend policy of the Company, any changes to the present Board of Directors of the Company and other material changes in the corporate structure or business of the Company.

As a result of the Merger, the Company Common Stock will be delisted from the NASDAQ Stock Market (and no longer be publicly traded) and will be de-registered under the Exchange Act, with the result that the Company will no longer file periodic and other reports with the SEC. Prior to the consummation of the Merger, the ESL Filing Parties expect the Principal Stockholders to contribute their shares of Company Common Stock to Transform in exchange for equity of Transform so that, following the consummation of the Merger, the Company will become a wholly owned subsidiary of Transform. Following the consummation of the Merger, the Board of Directors will be replaced in its entirety. In addition, subject to compliance with certain requirements under Transform’s existing credit facilities, the ESL Filing Parties expect Transform’s existing subsidiaries and the Company to leverage each other’s commercial and other relationships for their mutual benefit following the consummation of the Merger. Additionally, the ESL Filing Parties expect Transform to review the Company and its assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes, if any, would be desirable following the Merger in order to best organize and realize synergies from the ongoing activities of Transform’s existing subsidiaries and the Company. The ESL Filing Parties expressly reserve the right to make any changes that they deem necessary or appropriate in light of Transform’s review of the Company or in light of future developments. In addition, the ESL Filing Parties regularly review acquisition and other opportunities and may pursue such opportunities when appropriate.

Except for the delisting and de-registration of the Company Common Stock, the potential sale of the Outlet Segment, the potential business changes described in the preceding paragraph and other matters described in this information statement, neither the Company nor the ESL Filing Parties have, and are not aware of, any current plans, proposals or negotiations that relate to or would result in any extraordinary transactions, sales of material amounts of assets of the Company, material changes to dividend policy of the Company, any changes to the present board of directors of the Company, and other material changes in the corporate structure or business of the Company.

Alternatives to the Merger

As described above in the section entitled “Special Factors—Background of the Transaction” beginning on page 19 of this information statement, prior to transaction discussions with Mr. Lampert and Transform, the Board of Directors was in the process of reviewing and considering various strategic alternatives to address the declining operating performance and deteriorating financial condition of the Company’s Hometown Segment, including via a liquidation of the Company’s Hometown Segment.

 

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In response to the April 5, 2019 proposal from Transform to acquire the Company, the Special Committee continued to review, consider and prepare for potential alternative transactions (including a Company Transaction that would include a contingent value right feature, and a Hometown Transaction) and strategic alternatives (including a liquidation of the Hometown Segment, which Company senior management had concluded would be the best alternative for the Company and its stockholders in the absence of a transaction with Mr. Lampert on terms approved by the Special Committee). The Special Committee considered the risks and potential likelihood of achieving greater value for the Unaffiliated Stockholders by pursuing such strategic alternatives, relative to the benefits of a Company Transaction or a Hometown Transaction and, eventually, the Merger. In this regard, the Special Committee took into account the requirements imposed with respect to the Company’s ability to pursue certain strategic alternatives, including a liquidation of its Hometown Segment, as a result of the ESL Bylaw Amendment. The Special Committee also considered the fact that no third party approached or made any contact with the Company or its representatives regarding a potential acquisition of the Company from April 8, 2019 (the date the Company publicly announced that it had received an acquisition proposal from Transform) through May 31, 2019 (the date the Special Committee approved the Merger Agreement). For more information on the process behind the Special Committee’s determination, see the sections entitled “Special Factors—Background of the Transaction”, “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” and “Special Factors—Recommendation of the Board of Directors and Reasons for Recommendation” beginning on pages 19, 40 and 44, respectively, of this information statement.

As discussed above under the sections entitled “Special Factors—Background of the Transaction” and “Special Factors—Recommendation of the Special Committee and Reasons for Recommendation” beginning on pages 19 and 40, respectively, of this information statement, the April 5, 2019 proposal from Transform constituted the only firm offer to acquire the Company that the Company received during the last two years.

Relationships and Transactions with Related Persons

Description of Relationships and Transactions

As described in more detail in the Company’s Definitive Proxy Statement for the Company’s 2019 annual meeting of stockholders, the Company has significant business relationships with Transform resulting from a number of commercial agreements that were initially executed between the Company and certain Sears Holdings Companies in connection with the separation of the Company from Sears Holdings Corporation in 2012 and subsequently assigned by such Sears Holdings Companies to, and assumed by, Transform (the “Operative Agreements”). The descriptions and summaries of the Operative Agreements contained in this section are qualified in their entirety by the actual text of the underlying agreements and amendments that are included as exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019. References below to Transform are to Transform in its capacity as assignee of the applicable Sears Holding Companies under the Operative Agreements.

Pursuant to the Operative Agreements, and subject to certain requirements and restrictions as are detailed therein, the Company and Transform have agreed, among other things, to the following:

 

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the grant to the Company of (1) an exclusive, royalty-free, non-transferable and terminable license to operate, and to authorize Company dealers and franchisees to operate, retail stores and stores-within-a-store using the “Sears Outlet Store,” “Sears Authorized Hometown Store,” “Sears Home Appliance Showroom” and “Sears Hardware Store” store names through which the products provided by Transform may be sold, (2) an exclusive, royalty-free, non-transferable and terminable license to use the store names to promote the Company’s products, and services, which services were in existence as of the effective date, related to the Company’s products provided by Transform, by all future electronic means, channels, processes and methods, including via the internet, (3) a non-exclusive, royalty-free, non-transferable and terminable license to use, and to authorize Company dealers and franchisees to use, other trademarks and sell services related to the Company’s products under those trademarks, (4) an exclusive, royalty-free, non-transferable

 

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and terminable license to use certain domain names owned by Transform in connection with the promotion of the Company’s stores, the marketing, distribution and sale of the Company’s products, and the marketing and offering of services, which services were in existence as of the effective date, related to the Company’s products, (5) the right to use the store names to sell the Company’s branded products by all digital methods that are owned or operated by Transform and Kmart Corporation including the website for the Outlet Segment, (6) an exclusive license to use certain domain names and (7) a “springing” license upon termination of the underlying agreement to operate searsoutlet.com on web properties other than those owned or operated by Transform to promote and sell certain products in the United States, its incorporated territories and Bermuda until February 1, 2020;

 

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the grant to the Company of (1) a royalty-free license to use the Sears trademark as part of the Company’s corporate name in the United States and to promote the Company’s businesses and (2) a fully paid-up license to use the searshometownandoutlet.com and ownasearsstore.com domain names solely to promote the Company’s businesses;

 

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the sale by Transform to the Company of Sears-branded products and vendor-branded products obtained from Transform’s vendors and suppliers and the grant by Transform to the Company of licenses to use the trademarks owned by Transform in connection with the marketing and sale of products sold under such trademarks and the payment of fees and weekly royalties by the Company to Transform in connection therewith;

 

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the provision by Transform to the Company of, and the payment of fees by the Company to Transform for, certain specified tax, accounting, procurement, risk management and insurance, advertising (including online services), loss prevention, logistics and distribution, information technology (including point-of-sale systems for all of the Company’s stores), payment clearing, and other financial, real estate management, merchandise-related and other support services;

 

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the Company’s participation in the Shop Your Way Rewards Retail program under which Transform issues rewards points to program members when they purchase program-eligible merchandise and services from the Company’s stores and, for each qualifying purchase, the Company will pay the program a fee equal to an agreed percentage of the qualifying purchase for base points issued and for bonus points issued, if any, Transform will (1) authorize the Company to redeem points for program members as part or all of the purchase prices paid by program members when they make qualifying purchases from Company stores and (2) reimburse the Company for the dollar value of the points redeemed;

 

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the provision by Transform to the Company of transitional administrative services with respect to the Company’s employees including payroll, benefits, and other human-resource support services (which services, as of the date of this information statement, have been terminated) and the payment of fees by the Company to Transform in respect of such services, based on a combination of Transform’s costs to provide the services plus a specified profit margin;

 

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the leasing or subleasing of store locations by Transform to the Company;

 

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the continued provision by Transform of services to the Company in connection with a realization on the lenders’ collateral after default under the Company’s asset-based, senior secured revolving credit facility and the provision of notices and services to the agent of such facility for so long as any obligations remain outstanding under the facility; and

 

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the purchase by the Company of damaged, returned or distressed merchandise that Transform receives in the course of its operations as a third party logistics services company.

 

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Payments from the Company to Sears Holdings Corporation and from Sears Holding Corporation to the Company

In connection with the foregoing, the following table summarizes the payments received by the Company from Sears Holdings Corporation and payments made by the Company to Sears Holdings Corporation during the Company’s last two fiscal years.

 

		For the Year Ended February 3, 2018				For the Year Ended February 2, 2019
Net commissions received by the Company from Sears Holdings Corporation		$	66,347,000			$	50,964,000
Payments made by the Company to Sears Holdings Corporation related to cost of sales and for occupancy		$	958,560,000			$	689,599,000
Payments made by the Company to Sears Holdings Corporation for services performed by Sears Holdings Corporation		$	60,764,000			$	40,027,000

Seritage Growth Properties

In addition to the foregoing, during the Company’s 2019 fiscal year to date, the Company paid approximately $1.1 million for the year ended February 3, 2018 and $0.6 million for the year ended February 2, 2019 in occupancy charges for properties the Company leases from Seritage Growth Properties. Mr. Lampert is the Chairman of the Board of Trustees of Seritage Growth Properties.

Record Dates

On June 1, 2019, the record date for determining stockholders of the Company entitled to act by written consent with respect to the adoption of the Merger Agreement, there were 22,702,132 shares of Company Common Stock outstanding and entitled to vote.

On August 27, 2019, the record date for determining stockholders of the Company entitled to act by written consent with respect to the approval of the Liberty Sale to the extent such sale constitutes a Section 271 Sale, there were 22,702,132 shares of Company Common Stock outstanding and entitled to vote.

On August 27, 2019, the Company received the Liberty Consent approving the Liberty Sale to the extent such sale would constitute a Section 271 Sale. The Liberty Sale was executed by the holders of the requisite number of shares of Company Common Stock of the Company in accordance with Sections 228 and 271(a) of the DGCL.

The Board of Directors has not set a record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger. Accordingly, pursuant to Section 262(d)(2) of the DGCL, the record date for determining stockholders entitled to receive notice that appraisal rights are available in connection with the Merger is the close of business on September 12, 2019, the day preceding the date on which this information statement and accompanying notice is mailed to holders of Company Common Stock.

Certain Effects of the Merger

General Effects

If the Merger is completed, Merger Subsidiary will merge with and into the Company, the separate corporate existence of Merger Subsidiary will cease, and the Company will continue as the surviving company in the Merger and be wholly owned by Transform and/or ESL.

At the effective time of the Merger, holders of shares of Company Common Stock will cease to have ownership interests in the Company or rights as stockholders of the Company, except as provided in the Merger Agreement or by applicable law.

 

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