UPDATE: Sears Canada Shareholders Question Cash Use

Sears Canada Inc.'s (SCC.T) top executive was on the defensive at the company's annual meeting Friday as dissatisfied shareholders questioned the retailer's use, or lack thereof, of its hefty cash balance.

The debate took place just hours after parent Sears Holdings Corp. (SHLD) said it raised its stake in Sears Canada to about 90% by agreeing to buy all the shares held by U.S. hedge fund Pershing Square Capital Management L.P. at C$30 a share, or C$560 million.

At the meeting, President and Chief Executive Dene Rogers said Sears Canada has had good reason to hold on to its net cash of about C$1 billion, noting that others in the industry have similar cash/debt ratios.

But that didn't satisfy some shareholders in attendance who feel Sears Canada is more than able to start returning cash to shareholders.

The most vocal was Colin Stewart, portfolio manager at JCClark, who asked questions ranging from the company's cash deployment to potential conflicts of interest on the board. He also asked why Sears Holdings saw Sears Canada as a "attractive investment," yet Sears Canada didn't see reason to buy back its own stock.

Rogers responded that Sears Canada has been wise to preserve cash through the recession, and that the board will continue to look at options like dividends and buybacks.

Stewart also raised a potential conflict of interest in one independent director, E.J. Bird, and one former independent director, Jon Lukmonik, because of links to Sears Holdings chairman Edward Lampert. As well, Stewart sees William Crowley, executive vice-president of Sears Holdings and chairman of Sears Canada, being potentially conflicted.

Rogers said he didn't have concerns about any conflicts on the board.

When Stewart pressed for Crowley, who chaired the meeting, to answer questions directly, Sears Canada's general counsel, Claudio Leshnjani, intervened. He directed Stewart to pose such questions at Sears Holdings' annual meeting and said Sears Canada couldn't comment on the intents of any shareholders.

After the meeting, Sears Canada executives made no comments to reporters, but Stewart did. While he said it looks like Sears Holdings wants to privatize Sears Canada, he believes it still needs to convince a majority of the minority shareholders remaining - something it failed to do in a previous takeover attempt in 2006 at C$18 a share. Stewart said he wouldn't accept C$30, and that C$35-C$40 would be more acceptable.

Before its latest purchase, Sears Holdings had never paid more than C$18 a share for Sears Canada stock. A Sears Holdings spokesman wasn't immediately available to comment.

As a shareholder since 2002, Stewart said there was a time when management was much more communicative and rewarding to shareholders, but that's changed in the last couple of years. He's also frustrated that management won't meet privately with institutional investors.

Rogers said the company is careful because of selective disclosure rules and that having 6,000 shareholders with less than 1% of the stock makes such meetings "impractical." When asked if others had requested meetings, Rogers said "no."

-By Andy Georgiades; Dow Jones Newswires; 416-306-2031; andy.georgiades@dowjones.com

Sears Canada (CE) (USOTC:SRSCQ)
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