Sycamore Acquires Staples for $6.9 Billion in Largest Buyout of the Year

Sycamore Partners announced on Wednesday that it would acquire chain retailer Staples. Sycamore will pay $10.25 a share in cash for Staples, which finished trading Wednesday at $9.93. This price represents around a 20% premium from where the shares were trading in April, before it was announced by the WSJ that Staples was exploring a sale. According to Deallogic, this deal will be the largest leveraged buyout of the year in the United States.

Sycamore has made deals in the retail sector before, previously investing in department store chain Belk Inc, discount merchandiser Dollar Express, and retailer Hot Topic. However, this is still a bold move, as online buying has continued to eat away at brick-and-mortar's market share. Also, regardless of sector, private equity activity has been subdued as stretched valuations have made companies relatively expensive.

However, around two-thirds of Staples business comes from corporate and government business, which is seen as a more stable revenue source than the consumer market. Also, only a minority of Staples products are being sold at brick-and-mortar outlets, with $10.6 billion of their sales being delivered to customers as opposed to $6.6 billion sold in stores. Even still, sales and gross profits have fallen for each of the last four full years and the number of stores Staples operates has been in steady decline.

That being said, Staples only has around $1 billion dollars in debt, compared to their $18.2 billion in revenue. It seems that the company can survive the additional debt added to their balance sheet as a result of the buyout, a critical piece in future success of Staples. Sycamore should have an easy time cutting costs and streamlining operations, if they decide to go the route of many PE firms before them. However, another option would be to revitalize a merger with Office Depot that was previously shut down by antitrust regulators during the last years of the Obama administration. This would be on the first true test of the Trump administrations with regards to antitrust policy.

According to Reuters

Barclays and Morgan Stanley & Co. LLC are acting as financial advisors and Wilmer Hale LLP is acting as legal advisor to Staples. BofA Merrill Lynch and Deutsche Bank Securities Inc are acting as financial advisors and Kirkland & Ellis LLP is acting as legal advisor to Sycamore Partners.

UBS Investment Bank, BofA Merrill Lynch, Deutsche Bank, Credit Suisse, Royal Bank of Canada, Jefferies, Wells Fargo Bank, National Association and Fifth Third Bank are providing debt financing for the deal

Comments (6)

Best Response
Jun 29, 2017

@Jcr10" this one is interesting and a good potential buyout opportunity. Knowing what I know about office supplies (first job while in college) there is definitely a strong market for the services side of the business (i.e. Tech repair, printing and publishing, etc.)

I'm not sure what Sycamore has in mind but if they're listening they should strongly consider taking as much of it online as possible and treat the retail locations as a distribution point but still maintain the retail sites for small businesses looking to stop by for supplies.

They should also consider buying MicroCenter and if not, they need to revamp their tech support to be true diagnostics and support. I imagine they operate their tech support similar to OfficeMax which outsourced repairs via remote computing and the sales force rarely knew anything beyond basics about computers (doesn't instill trust in customers).

Switching to a true tech support model may cost more but will allow you to make more and solidify yourself as a dependable one-stop shop for small to medium sized businesses.

They should also reduce their footprint and get rid of locations that are under performing (not always the fault of the sales force as some areas are just duds).

Lastly they need to learn supply chain and hub-and-spoke distribution modeling from the likes of Amazon. I can venture to guess they have too much inventory of things that are overpriced and or stuff no one wants. Get better and more efficient at providing what customers want instead of trying to shove crap products down the throats of customers.

Overall a good move nonetheless...

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Jun 30, 2017

Interesting deal to be sure -- will be curious how this turns out

Jun 30, 2017

Update: WSJ just published a piece about Sycamore's plan for Staples which:

Calls for Staples to be divided into three separately financed entities, according to people familiar with the matter: U.S. retail; Canadian retail; and corporate-supply businesses. The three groups will remain under the same corporate umbrella.

The move is designed to make the leveraged buyout of Staples, announced Wednesday, an easier sell to bond and loan investors whose appetite for retail names has soured as the industry's prospects have waned. Their appetite will be crucial to financing the deal, the largest LBO announced this year.

UBS AG UBS 0.35% , Bank of America Corp. and other Wall Street banks plan to arrange bonds and loans backing only the Staples unit that distributes paper, pens and other supplies to large business and government customers, the people said. The delivery operation is the largest and seen as the crown jewel of Staples.

link for article:

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Jun 30, 2017

@Jcr10" interesting strategy at the top level and one that makes sense. I wonder if their focus is on North America primarily? What about international operations?

Thanks for the update Jcr10!

Jul 3, 2017

International will most likely not be a part of the strategy, as Staples Europe has been sold to another (distressed) PE fund last December. Interested to see how that is going to turn out..

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Jul 2, 2017