Sears Holdings Reminds Restoration Hardware of its Upper Hand

The key paragraph in the letter filed yesterday from Sears Holdings (SHLD) is the last one, where it calls out to management and the board of Restoration (RSTO) and states that "as your largest stockholder, we are concerned by certain aspects of the management and director-led buyout."

Now, it should also be noted that Sears upped its offer from $4 an share to $6.75 a share. Sears, being the largest shareholder (double that of the next largest shareholder) here does have management in a precarious situation. I would bet Lampert has been buying more shares recently (or soon will be) and will up his ownership percentage. At that point, what management wants to do could become essentially irrelevant.

One has to think management is stonewalling Sears in order to keep their jobs since they are the ones trying to buy the company currently. If Lampert gets control of more shares, it will become a moot point. Currently shares trade about 25 cents over Lampert's offer price, indicating folks feel Lampert will eventually pay more. That being said, Lampert could double his ownership to 27.4% for about $1.5 million more than he would pay if the offer price was accepted. It would be a rather cheap premium to pay to all but assure a deal.

Also, the letter twice refers to Sears as "your largest stockholder". It is a veiled way of saying "hey, we own more of this sucker than you do, want to get ugly?
Go ahead."

Now, Restoration management has done the right thing in waiting this out until now to get a higher price. However, there now comes a point where they will be viewed as obstructing the process rather than getting the best deal. This is especially apparent since they are the other bidder for the company and their offer is now inferior to the one Sears has made. Sears, being the "largest stockholder" does have the the upper hand should things get contentious.