UPDATE 4-Sears to spin off big chunk of Canada unit
* Will cut Sears Canada stake to 51 pct, from 95 pct
* Q1 adj loss 31 cents/shr vs Street View loss 67 cents
* Sears shares up 11.1 percent in morning trading
By Phil Wahba
May 17 (Reuters) - Sears Holdings Corp said on Thursday it plans to spin off a large chunk of its stake in its struggling Canadian unit, which Chairman Edward Lampert had spent years trying to gain control of, in the latest move that will shrink the company.
Separately, Sears Holdings, which includes its namesake chain and the discount Kmart chain, reported a first-quarter adjusted operating loss that was significantly better than the loss analysts had estimated.
Sears Holdings owns about 95 percent of Sears Canada , which will be trimmed to about 51 percent after the spinoff to Sears Holdings' shareholders - effectively a stock dividend.
Sears Canada has seen its sales and earnings plummet in recent years and been a drag on Sears Holdings.
Shares of Sears Holdings surged 11.1 percent to $56.52 in early trading. Since early January, the stock has nearly doubled as the company announced plans to shed assets, including stores and leaseholds, and to spin off its Sears Hometown and Outlet businesses. The company expects this spinoff, which could raise as much as $500 million in cash, to close later this year.
In December, it had spun off Orchard Supply Hardware Stores Corp.
Credit Suisse analyst Gary Balter called the Canada spinoff another example of a move "to what we believe is a liquidation of the Sears Holding Company."
TRIMMING ITS STAKE
Spinning off a good part of its Sears Canada stake won't raise cash, but will allow shareholders to cash out a part of their investments, and could attract investors interested in Sears but not in its Canadian unit.
"It's a way of taking some value out of Sears Holdings and distributing it directly to shareholders," Imperial Capital Managing Director Mary Ross Gilbert told Reuters.
"It's a way for them to be able to monetize a piece of Sears. If you distribute the shares to them, they could sell it."
Sears said it could, later, further reduce its Sears Canada stake. Sears Canada shares will continue to trade on the Toronto Stock Exchange.
Sears Canada and Sears Holdings said in separate statements that the spinoff would allow each to focus on its business.
Sears Holdings also reported on Thursday that it earned a net income of $189 million, or $1.78 per share, in the quarter ended April 28, helped by the sale of some stores and leasehold interests, compared with a $170 million loss, or $1.58 per share a year earlier.
The retailer reported an adjusted loss from continuing operations of 31 cents per share, much better than the 67-cent loss analysts expected, according to Thomson Reuters I/B/E/S.
Overall, Sears Holdings revenue fell 2.8 percent to $9.27 billion, hit by store closings, declines in sales of appliances and home electronics, and weakness in Canada, but exceeded the $9.15 billion Wall Street analysts had expected.
A few weeks ago, Sears Holdings laid out a blueprint for boosting results, urging everything from investing millions of dollars in the retailer's "Shop Your Way" rewards program to improving the layout and signs in its stores.
Sears Holdings has seen lower sales every year since Lampert combined Sears with Kmart in 2005.
COMPETITION IN CANADA
Two years ago, the company significantly added to its stake in Sears Canada by buying 17.3 percent of the Canadian unit from hedge fund manager William Ackman's Pershing Square Capital Ma n agement, bringing its ownership at the time to 90.4 percent.
Ackman and other minority investors had thwarted Sears Holdings' attempt in 2006 to buy the shares of Sears Canada it did not already own.
When Sears bought out Ackman's stake in 2010, analysts praised the move, saying the cash-rich Canadian unit was a way to improve Sears Holdings' financial position.
But Sears Canada's fortunes have reversed course since then, and it has been a drag on overall results.
On Wednesday, Sears Canada reported sales at stores open at least a year - a key measure for retailers - fell 6.3 percent, a far steeper drop than the combined 1.3 percent decline at Sears's U.S. stores and Kmart discount chain.
That follows a 7.7 percent drop in 2011, as well as declines in the two preceding years. In 2011, Sears Canada had an operating loss of $20 million, compared with a $390 million profit two years earlier.
And Sears Canada faces the prospect of even tougher competition next year, when Target Corp opens as many as 135 Canadian stores.
Meanwhile, Wal-Mart Stores Inc's reported on Thursday that its Canadian same-store sales in the first quarter were up 3.7 percent. The company plans to open more stores there in what Walmart International CEO Doug McMillon described as "the largest expansion program in Walmart Canada's 18-year history."
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