Hey, What's This Guy Up To?

Despite all that's happened, Edward Lampert is optimistic about the U.S. auto business.

Who?

Lampert is a sophisticated investor who could dramatically change the automobile business, becoming a major player in vehicle sales, service and repair.

The Yale graduate, through his hedge fund ESL Investments and other holdings, has quietly become the owner of 44% of AutoNation Inc., the nation's biggest car retailer with 322 franchise stores.

Equally impressive is his almost 40% holdings in AutoZone, the nation's largest parts and aftermarkets retailer.

In some financial circles, Lampert, 45, has been compared as the new version of Warren Buffett for his innovative, dynamic and knowledgeable investment strategies and tactics and financial success.

Equally important is the turn-around he orchestrated when ESL bought Kmart out of Chapter 11 Bankruptcy for almost $1 billion, but within days, he had recouped his investment by selling some of Kmart's undervalued real-estate assets for $900 million.

When other Kmart properties were disposed of, ESL realized profits of more than $3 billion profit.

Then Kmart bought Sears, which was declining in sales, but at one time was America's largest retailer. Most of its 3,900 stores have on-site facilities for automotive service, repair, parts and tire sales.

Recently, a professional investor and advisor, asked what I thought about Lampert's investment companies putting AutoNation, AutoZone and Sears' auto repair operations together to form a retailing, parts and service giant.

My first reaction was — wow! — it seemed to make sense as a unique hypothesis.

As a consultant to Kmart's retail advertising agency during the Lampert acquisition period, I was impressed by his skills and accomplishments.

And in interviewing AutoNation CEO Mike Jackson, I found him focused and knowledgeable.

I began research, using records from various stock services, Security Exchange Commission filings and insights from analysts.

What I found is that more than $7.5 billion has been invested through Lampert's various funds and investment sources.

SEC filings indicate quite a significant range of prices paid for holdings in AutoNation since 2006. The high price has been $17.79 while the low was $9.81. The two-year high for the stock was almost $25 early in 2007. Current market capitalization is $2.25 billion.

The credit crunch is hurting all automobile sales and the cost of money for floor plans is going up too. In 2007, AutoNation spent $133.1 million in floorplan expenses alone and an additional $114.3 million for “other interest” expenses.

Standard & Poor's (S&P), a key publisher of financial research and analysis on stocks and bonds has put AutoNation on “credit watch” which lowers its credit rating to potential investors.

AutoZone, with a market capitalization of $8.37 billion, is four times larger than AutoNation. Stock purchases made by Lampert's various investment companies have ranged from a low of $103.07 to a high of $143.80.

The largest Lampert investment is in Sears Holding Corp which has not been doing well in the worsening economy and declining market. New top management has been added in an attempt to shore-up the ailing retailer.

ESL, the hedge fund which is the major investor in all three, did not have a great year in 2007. Estimates reported a 27% drop in profits for the fund.

So does the troika of AutoNation-AutoZone-Sears make sense?

One of the advantages of Lampert's holdings is the ability to put his people on the corporate boards of directors thus controlling operations and destiny. Two Lampert acolytes, who are members of the Sears and AutoNation board of directors, have become part of AutoZone's board.

This means almost one fourth to one third of both boards have Lampert representatives in place and can thus rule the board. Wall Street uses the term interlocking or overlapping boards.

With controlling interest in all three companies it would be relatively easy to (a) merge them into one or (b) have Sears buy AutoNation and AutoZone or (c) some variation of the first two.

It would be a colossal consortium.

Interestingly, Bill Gates of legendary Microsoft fame, through his private investment company, Cascade Investments LLC, early this past summer bought 9.9 million shares of AutoNation for $83 million.

Could these moves lead to a new business model: the automobile business becoming the business of automobiles?

Marty Bernstein is an auto journalist and former advertising executive.