Sears Brand Bonds

LEAVE IT TO A ROCK STAR
It took rock star David Bowie's financial advisor David Pullman to figure out how to monetize an intangible asset like the future royalties on his albums.

A bond can be secured by any dependable stream of revenue—corporate earnings, tax receipts, mortgage payments ... Wall Street financier David Pullman ... in 1997 rocked investors with " Bowie bonds," backed by royalties on the songs of David Bowie ...

Bowie Bonds are asset-backed securities of current and future revenues of the first 25 albums (287 songs) of David Bowie's collection recorded before 1990. Issued by David Bowie in 1997, they were bought for $55 million by the Prudential Insurance Company.

A BOND BY ANY OTHER NAME
The meaning of the word "bond" is symbolic of the huge gap between the language of corporate finance and traditional marketing. In corporate finance "bond" is a noun. As used in the article "The New Alchemy At Sears" in the April 16, 2007 issue of Business Week.

In traditional marketing "bond" is a verb describing the relationship between a consumer and a brand. If you were to search the Internet for the phrase "Brand Bonds" before this Business Week issue hit the news stands, most of the returns would refer to the traditional marketing definition.

For example Susan Fournier, a Boston University Marketing Professor, in her Harvard Business School working paper "The Consumer and the Brand" presented:

… empirical support for the phenomenological significance of consumer-brand bonds.

The strategy consultant Stephen Landis on his web site recommends that:

Ensuring that brand innovations are aligned with your strategy strengthens the brand bonds that drive profitable growth.

And Martin Lindstrom argues that:

Finding the human story for your online brand is therefore essential for you to build even stronger brand bonds.

SEARS NEW ALCHEMY
The new alchemy at Sears Holding Corp (SHLD) refers to the financial meaning of a "bond." Edward Lampert's financial engineering took the meaning of asset-backed securities to a new level:

BusinessWeek has learned that Sears has created $1.8 billion worth of securities based on the brand names Kenmore, Craftsman, and DieHard. In essence, it has transferred ownership of the brands to another entity, which it then pays for the right to use the brands."

OUT OF WHOLE CLOTH
What's so different from this and what David Pullman did for David Bowie ten years ago? In short: royalties paid under contract with an independent third party. Sears transferred ownership in these three brands to a company called KCD IP owned by a subsidiary that issued $1.8 billion in bonds backed by the (declared) intellectual property value of the brands:

Sears has, in essence, created licensing income from whole cloth. First it transferred ownership of the brand names into KCD. Now, KCD charges Sears royalty fees to license those brands and uses the royalties to pay the interest on the bonds.

Why did Business Week say the licensing income was created out of whole cloth? Probably because the $29 billion market cap of Sears Holding (on April 10, 2007) was barely equal to the $30 billion book value of all its assets … including the $5 billion book value of its Goodwill and other Intangibles. Also because the bonds have not been released to the market, so we don't know the real value of these intangible assets.

MONETIZING OTHER BRAND VALUES
If Eddie Lampert's ideas were applied to other brand portfolios will it set off the kind of action suggested in by Don Davis in the Business Week article?

Don Davis, managing director and general counsel at Commercial Strategy, a Boston intellectual property consulting firm, says the potential for a market in bonds backed by intangible assets could be even bigger than the market for junk bonds, given that 70% to 80% of the total value of the stock market rests on intangibles such as intellectual property. "The scale is astounding," he says.

Is he right about the potential for brand bonds? Have you got any ideas on where and how to create other brand bonds?

~V

Comments

[Doc]

Todd,

Thank you for your comment. Please forgive the long delayed reply. Sometime I'm not able to respond to comments in a timely way. You can learn more about my book directly from the publisher by clicking on this URL: http://academic.cengage.com/cengage/instructor.do?codeid=7E9A&sortby=copy&type=all_radio&courseid=MN20&product_isbn=9780324405972&disciplinenumber=414&codeFlag=true

[Todd Sullivan]

Victor,

Great post (and site). Thank you for your comments on Seeking Alpha. I would be very interested to learn more about your book.

Todd