Financially, based on Sears’ 2004 results, Kmart is paying a multiple of 25 times earnings, a fairly rich multiple for a struggling retailer. In addition, Kmart has its own set of brands — including Joe Boxer, Martha Stewart Everyday and Thalia — and Sears owns such brands as Kenmore and Lands’ End, which could create cross-synergies through merchandising all the brands in both stores. Those advantages would be lost in any bid for Sears by a nonretailer. That puts further pressure on any third party coming in to bid for Sears to have a compelling story in order to stop the Kmart-Sears transaction.
Speculation about Vornado’s interest in Sears gained speed when the REIT filed a shelf registration with the SEC. A REIT analyst, who could not speak on the record because his firm doesn’t cover Vornado, cautioned, though, that too much shouldn’t be reach into the filing since many companies routinely refile just to maintain a degree of financial flexibility.
Proceeds received from the sale of shares are often used for general corporate purposes, another way of enhancing a company’s liquidity. In the case of Vornado, it could also be preparing for what it hopes to be a winning bid on the Polo store in Manhattan at 72nd Street and Madison Avenue, with the purchase price possibly going as high as $70 million.
Vornado is already active in the retail real estate world, as well as in the office markets in New York and Washington, D.C. Its office holdings in both cities total about 25 million square feet. The company owns about 30 percent of New York City retail property owner Alexander’s, while its other retail properties include about 90 shopping centers. Vornado’s Merchandise Mart division owns 10 properties, including Chicago’s Merchandise Mart and the Los Angeles Mart. It also produces trade shows.
From a financial standpoint, the REIT is on solid ground and could easily find a partner to bid on Sears. At the close of Vornado’s most recently reported quarter, ended Sept. 30, 2004, the REIT had total assets of $8.1 billion and long-term debt of $4.2 billion. The company’s cash and cash equivalents totaled over $200 million. Earlier this month, more cash poured in when Vornado was repaid $275 million in loans it secured via an interest it had in New York’s General Motors building.