Restoration Hardware To Sears: Not A Blue Light Special

HARD TO GET Restoration Hardware has expressed reservations about Sears’ offer.

If Sears Holdings were to succeed in its bid for Restoration Hardware, it would make the notable addition of a higher demographic audience to the Hoffman Estates, Ill.-based conglomerate.

From the Kmart discount chain to the mid-range Sears store formats, Sears Holdings’ core consumers traditionally have come from homes up to and including the suburban split-level. Restoration Hardware, then, would bring Sears Holdings into high-end lofts and other urban dwellings, upscale gated communities and to an audience of wealthier, more style-conscious consumers.

But Restoration Hardware would have to first comply with the bid, and that doesn’t appear to be a likely scenario.

Sears Holdings offered $6.75 per outstanding share of the high-end home decor retailer, or about $269 million, a smidge above the $6.70 offered by private equity firm Catterton Partners. Restoration Hardware had accepted the Catterton bid but is required by the Securities and Exchange Commission to accept offers from other interested investors until Dec. 13. That’s when Sears stepped in.

“While we do not understand your requirement that we submit such a proposal prior to providing us with due diligence information,” Sears said in a letter last month, “we are prepared to inform you that, based on the public information currently available to us, we would be prepared to enter into an agreement to offer your stockholders $6.75 per share in cash via tender offer.”

But Restoration Hardware had some issues with the proposal.

“Instead of agreeing to the standstill agreement to which other interested parties have agreed, Sears has proposed to reserve the right to launch a tender offer outside the process," read a statement from Restoration Hardware’s independent committee, released in response to media inquiries on the Sears offer.

Sears Holdings, which already owns a 13.7 percent stake in Restoration Hardware, earlier said the decor chain had denied its request to view confidential financial data prior to making a binding offer.

However, Restoration Hardware cited the standstill agreement—essentially a promise that Sears won’t attempt a hostile takeover—as integral to any further dealmaking.

“Sears is an American icon,” said Ray Hemmig, chairman of Restoration Hardware’s independent committee. “We are flattered that it is interested in learning more about our company. We welcome its participation in the process along with the other interested parties. However, the committee is firmly committed to a fair process that will yield the best results for all stockholders.”

Restoration Hardware, in some ways, was a surprising choice in light of the decor chain’s recent financial performance. In August, Restoration Hardware announced it would cut 100 jobs at the company’s Corte Madera, Calif.-based headquarters in order to save $9 million annually. In its second quarter, the company swung to a $5.5 million loss from $2.2 million in earnings in the previous year.

With 100 stores in the United States, Restoration hardware has seen stiff competition in its core assortment of house-branded decorative plumbing fixtures, window treatments, furnishings, linens and lighting. Its chief competitors are high-end merchandisers like Pottery Barn and Crate and Barrel, and mid-range retailers like Pier 1 Imports and Bombay Company.

The market for those retailers has been brutal. In October, Bombay Company declared bankruptcy and started going-out-of-business sales at all its stores in the United States (the retailer now will operate solely in Canada). Pier 1 has seen 14 straight quarters of losses, and Pottery Barn has been blamed for lower numbers at its parent company, Williams-Sonoma.

Sears Holdings has remained silent on its goals for Restoration Hardware. Several analysts have commented on the sourcing benefits and the appeal to a higher demographic that Restoration Hardware would bring.

In terms of how Sears Holdings will go about pursuing its proposal to Restoration Hardware, some of the writing is already on the wall. As previously mentioned, Sears Holdings already owns a 13.7 percent stake in Restoration Hardware, which the company made public on Nov. 19, 11 days after Restoration Hardware announced its deal with Catterton Partners.

When Kmart announced a bid to acquire Sears in 2004 for $11 billion—eventually forming Sears Holdings—the move was implemented by then-Kmart Holdings chairman Eddie Lampert, now chairman of the board for Sears Holdings. Like the Restoration Hardware bid, that move came as a surprise to many, as well.

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