Kmart Given Green Light
Bankruptcy judge OKs settlement; 
retailer hopes to have new board in control by May 5

By Karen Dybis
The Detroit News

CHICAGO -- U.S. Bankruptcy Judge Susan Pierson Sonderby late Tuesday signaled the end to Kmart Corp.'s painful Chapter 11 bankruptcy proceedings by approving the retail giant's reorganization plan.

"Hopefully you will be successful," Sonderby told Kmart executives and attorneys after an extended court session that didn't end until 10:16 p.m. Detroit time.

Five creditor objections were settled or dismissed in the final hours of proceedings. About 188 objections were filed in recent weeks, forcing proceedings to last a week longer than expected.

The approval of the reorganization plan allows Kmart to emerge from the largest retail bankruptcy in U.S. history in early May. Sonderby's order, in effect, eliminated some $7.8 billion in debts owed by the retailer.

Company officials estimate it will take about 10 days to put the necessary documents in place for Kmart to emerge around May 5.

That is the same day that Kmart will cancel its existing stock so it can reissue new shares to pay off its creditors.

Kmart CEO Julian Day said he was "jubilant" about Tuesday's confirmation and said he is focused on building a vital retailer.

Day dismissed suggestions that Kmart may struggle outside of bankruptcy protection. Kmart, which had $25 billion in annual sales in fiscal 2002, has a core group of customers and the company hopes to attract new ones in the future, Day said.

Emergence is like a new birth for the century-old retail chain. It means an end to the court's powerful protection and that Kmart would no longer be under the careful watch of the bankruptcy court. It also means the company will have new ownership and a new board of directors.

The question is whether Kmart is ready to emerge -- an issue raised by retail experts and some Kmart creditors during the four-day confirmation hearing.

Realistically, the Troy-based retailer faces the same sleepy economy, profit-hungry competitors and challenging market factors that drove it into Chapter 11 reorganization Jan. 22, 2002.

"You've got to give people a reason to shop at your store," said Patrick O'Keefe, a turnaround expert and president of O'Keefe & Associates in Bloomfield Hills. "What is your niche? What is the thing that's going to entice people to shop at Kmart?"

Kmart officials say the new Kmart, a smaller, leaner company with conservative goals for the future, is prepared.

340 Leases Rejected

Using bankruptcy as a business tool, Kmart has rejected more than 340 leases from long-closed stores and shuttered another 600 locations that either were unprofitable or did not meet the company's new competitive standards.

Kmart has dropped or renegotiated many of the expensive contracts that hurt its profitability, while it is maintaining those that gave the chain its cache, like its billion-dollar contract with Martha Stewart Everyday brand.

Part of making the retailer leaner has meant overhauling management. All of Kmart's former managers are gone, most were removed for participating in a controversial bonus program that shelled out millions in "retention loans" while Kmart's finances floundered. As a result, legal actions arising from Kmart's internal stewardship review of these individuals probably will stretch well into the future.

Michigan has felt the brunt of Kmart's cuts. The number of employees at the company's Troy headquarters, dropped to about 2,600 employees from nearly 5,000. Of the 57,000 jobs cut nationally from Kmart stores, about 3,000 came from this state. And most of those employees did not receive severance payments as part of their dismissal.

Intense Hearings

Days of intense hearings in a Chicago bankruptcy courtroom have been leading up to the court's decision on Kmart's plan. Originally, the company's bankruptcy lawyers believed they could complete the confirmation process last week with little disruption because more than a majority of Kmart's creditors had voted in favor of its reorganization plan, which pays their claims with a mix of cash and stock in the newly reorganized company.

But a speedy confirmation was not in the cards. Kmart faced the 188 objections to its plan, most of which were negotiated in the two weeks surrounding the confirmation hearings. About 75 were remaining when Kmart stepped into court on Monday.

Additionally, a handful of attorneys representing unhappy creditors made sure the hearings stretched out, questioning everything from Kmart's proposed business plan to whether its company executives could be considered expert witnesses.

Their filibustering was effective. For example, Kmart settled an objection with insurance company Capital Factors because its attorney was so effective in dragging out his cross-examination of Hutchison that the hearing had to go into a second week.

Kmart also resolved an objection by rival Wal-Mart Stores Inc. over whether Kmart had infringed on a product patent. That issue likely will wait until after Kmart emerges on May 5.

These moves were largely grandstanding in what otherwise appears to most parties as a done deal. Kmart is simply too valuable a company to liquidate, and its fortunes affect so many businesses that the companies had to reach an agreement so Kmart could move forward.

Sheryl Toby, who represented Kmart music supplier Handleman Co. of Troy, said the process put a great deal of strain on the retailer's vendors.

"Handleman generally supported the confirmation of the plan," Toby said. "And we hope that they treat their vendors fairly going forward."

New ownership

The most significant change is its new ownership. More than half of the company now belongs to Edward Lampert, a reclusive millionaire whose privately held hedge fund has made a fortune investing in downtrodden companies.

Historically, retailers find emerging from bankruptcy is like trying to escape from quicksand. However, Lampert is known for his business acumen and tends to stick around if he feels a company has growth potential.

Last fall, Lampert's company, ESL Investments Inc. of Greenwich, Conn., bought up millions of dollars in Kmart claims in exchange for larger shares of stock in the newly emerged company.

His role at Kmart grew larger in January when the retailer announced Lampert was contributing millions to Kmart's emergence plans, giving the retailer the money it needs to pay off its lenders and fund some of its cash needs.

Tim Skillman, principal with BBK Ltd. in Southfield, said Kmart must obey "the golden rule" when it comes to dealing with Lampert.

"He who owns the gold makes the rules," Skillman said. "He does control this company and (although they are not public yet) he does have specific plans for it. You cannot look at the future of Kmart without taking into consideration what this man's history and strategy might be."

Lampert is known as the driving force behind Kmart's commitment to emerging in 2003 when it had considered taking its creditors' advice and staying under court protection until 2004 or later.

His investment agreement put an end date on Kmart's reorganization, saying it must emerge by May 31 or lose any funds he planned to contribute.

Big Planning Role

Besides his stock holdings, Lampert will be a factor in Kmart's big-picture planning. Lampert's financial investments gave him the power to appoint four members of Kmart's new board of directors. Along with himself, Lampert added two of his company's officers and one of his fund investors to Kmart's board.

"He's going to be very hands on," predicted O'Keefe. "He's got the primary risk."

Kmart's new board is expected to hold its first meeting within weeks of the company's emergence. Day has said its first order of business will be a variety of corporate governance issues, including establishing the new company's bylaws and other similar matters.

Day takes the reins of a company in the early stages of its redevelopment. While Kmart is an American icon, many households have forgotten its existence. Kmart's sales have slipped throughout the bankruptcy as shoppers failed to return at the rate the company anticipated.

The former Sears executive also has to complete his executive staff. Right now, he has an office full of hired guns, all who came in for the reorganization and plan to leave shortly after emergence.

You can reach Karen Dybis at (313) 222-2319 or kdybis@detnews.com.