AutoNation, Sears, and Autozone Getting Closer Together

Includes: AN, AZO, SHLD
by: Todd Sullivan

So when will the combination of the three happen?

AutoZone (NYSE:AZO) added two new Board Members the other day. They are:

  • William Crowley, a former managing director of Goldman Sachs (NYSE:GS). Crowley also has served as a director of Sears Holding (NASDAQ:SHLD) since 2005. He has served as a director of Sears Canada Inc. since March 2005 and as the chairman of the board of Sears Canada since December 2006. Since 1999, he has been president and CEO of ESL Investments Inc., a private investment firm run by Sears largest shareholder Eddie Lampert. Crowley also serves as a director of AutoNation (NYSE:AN) Inc.
  • Robert Grusky founded Hope Capital Management LLC in 2000 and serves as its managing director. That same year he co-founded the private equity firm New Mountain Capital LLC and served as principal, managing director and member. He's now a senior adviser. Grusky is a director of AutoNation (AN) and Strayer Education Inc.

The additions were part of a late June agreement with ESL and Lampert regarding his ownership.

This now means the three boards have overlapping representation. Lampert controls the Sears Board, and will have 20% to 30% of the AutoZone Board after the 2008 Meeting in December and 25% of AutoNation's.

What does it all mean? Is he taking them private? No. There is no way with the incestuous Board relationships that Lampert could pass any "fairness" test in a "taking private" scenario.

What then? Lampert will eventually own all three under the Sears Holdings umbrella. Sears in one swoop will become the nation's largest auto dealer, auto parts and auto repair company, with considerable pricing and cost savings power.

When? Not this year. Next, maybe. But wait you say, ESL owns the shares of both AutoZone and AutoNation, not Sears. So what? Lampert can sell the shares to Sears in a private sale and in a day Sears owns almost 50% of both companies. Lampert needs no authority from either group of investors (ESL or Sears) as he has full authority to allocate capital as he wishes now. ESL investors would most likely be happy to take less for their AN and AZO shares now (than a public auction would garner) recognizing they are still the largest shareholders of Sears and will make the money in spades later.

Folks who have $5 million to let Lampert lock up and play with for 5 years see the bigger picture.

If this eventually happens, one has to think it has been in the cards for years now. That would possibly make Lampert the most patient man in the world...

Disclosure ("none" means no position): Long SHLD, AN, None.