Here's the endgame for Sears. It doesn't look good

Sears chairman Eddie Lampert reached an 11th-hour agreement Tuesday to make changes to his hedge fund's bid to buy the company's operating assets and keep 425 Sears and Kmart stores open.

But the problems facing the company are significant, and hurdles could derail Lampert's efforts to buy the company over the next four weeks.

Lampert submitted a new bid late Wednesday, upping his offer to $5 billion. He also made the $120 million downpayment by a required deadline. That's about $600 million more than his previous bid.

Auction of assets

Monday, January 14, is the deadline for bidders to submit details of their offers for Sears' operating assets. Although Lampert's bid will probably be the only one that would keep the company operating, Sears is expected to receive other bids for some store leases and other assets.

Many of the stores up for sale are in places with high real estate values. In many cases, Sears is putting its mall-based store leases up for sale — not the property itself. But Sears has held those leases so long that many would offer below-market rents for whichever company gets the lease.

Companies that specialize in store-closing sales could bid for the inventory in Sears' remaining 425 stores.

And the winner is ...

On January 16, Sears is scheduled to reveal the results of its auction to the bankruptcy court.

If all the other bidders combined offer more than the $5 billion that Lampert is offering, he'll lose out. But those other bidders could win part of what is up for sale, and Lampert could be given the chance to buy the rest at a reduced price.

"There is flexibility built into the process," said Todd Feinsmith, co-chair of the bankruptcy practice at the law firm Pepper Hamilton. "At the end of the day, the court will want to approve the scenario that presents the best value to the creditors. The best scenario could be one with horse trading on who gets what properties."

Lampert would forgive $1.3 billion of Sears' debt he now holds, and in exchange he would gain control of its assets. When sizing up Lampert's bid against the others, the judge is expected to factor in how much cash Lampert is offering. The question is which one provides the most value to creditors. Lampert's bid could, in theory, lose to a rival bid with a lower overall value if the rival offers more cash.

Lampert also offered to accept more of Sears' liabilities than than he did in his previous bids. And he said he would pay $43 million in severance to Sears employees who have already lost or will lose their jobs.

The legal challenges

But the announcement of the winning bidder, or bidders, won't be the final on January 16. Other parties, including creditors, have eight days to challenge the decision in court. The committee that represents many of the creditors is already on record challenging Lampert's right to use debt forgiveness as part of his bid.

The creditors argue that the judge should not accept debt forgiveness as part of Lampert's bid, because Lampert loaned Sears the money when he was CEO. The creditors' attorneys question whether the terms of those loans unduly benefited Lampert and his hedge fund rather than Sears.

Lampert and his hedge fund argue the loans were proper and made to keep Sears alive. But if the judge accepts the creditors arguments, Lampert probably won't be willing to put up the cash needed to make a winning bid.

The final decision

The judge could decide by the end of the month, or early in February, who should be awarded the assets. The sale or sales could be completed in relatively short order after that.

What is being bought as part of this auction are the company's most valuable assets. Other parts of the company, including closed stores, debt and other liabilities, will remain in bankruptcy court and could take months or years to dispose of.

If Lampert doesn't win the bid, the process of shutting down Sears will begin. The company probably would remain in business for a few months during store-closing sales. Although a last-minute bid to save the company could emerge, as happened with Toys "R" Us a year ago, that would be a long shot.

The outlook

Lampert argues his bid will give Sears a chance to be profitable and competitive.

"We believe our proposal will provide substantially more value to stakeholders than any other option, in particular a liquidation, and is the best path forward for Sears, its associates and the many communities across the United States touched by Sears and Kmart stores. We look forward to having our proposal evaluated by the debtors at Monday's auction," said a spokesperson for its hedge fund.

But others doubt that the new Sears would have a long-term future ahead of it. They point to other retailers, such as RadioShack and grocer A&P, which emerged from bankruptcy only to refile in relatively short order.

"I don't know how, without significant additional investment, how do you change the reality of that business," said Philip Emma, a senior analyst with Debtwire and an expert in retail bankruptcies. "And putting up a lot of cash has never been Lampert's thing."

Sears hasn't posted an annual profit since 2010 and has lost $12 billion since then. It is losing the battle to Amazon (AMZN), Walmart (WMT), Home Depot (HD), Macy's (M), Kohl's (KSS) and other retail rivals.

And Sears will be very much a regional player, with Sears and Kmart stores absent in much of America's heartland.

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