Staples

Staples, the office supply chain, has reached an agreement with private equity firm Sycamore Partners to be acquired for about $6.9 billion, or $10.25 per share, the companies announced. Staples has been the subject of takeover talk for weeks as it struggles in the face of competition from online retailers. It closed 48 stores in North America last year and announced plans to close 70 more this year. The company’s first-quarter revenue was down 5% year-over-year.

In a statement, Staples said the deal price represents a 20% premium to the 10-day volume-weighted average stock price for the period ended April 3, when speculation about a deal hit the media. The deal would be the biggest to-date for Sycamore.

“With the support of Sycamore and as a private company, we will be better equipped to continue to transform to meet changing customer needs in an ever-evolving and competitive marketplace,” Staples CEO Shira Goodman said.

Staples Chairman Robert Sulenic said various alternatives were considered but the board of directors believes the Sycamore proposal is in the best interests of shareholders.

Some Staples shareholders are unhappy with the deal. Richard Pzena, the CEO of Pzena Investment Management in New York, told Barron’s that the transaction undervalues the company. “Based on what we know so far, we’re likely to vote against it,” Pzena told Barron’s.

In the wake of the transaction announcement, the three major credit rating agencies said they were placing Staples’ credit rating on review for a downgrade. Fitch Ratings, which placed Staples’ long-term default rating on “negative watch,” said that because the acquisition may be as much as 70% to 80% debt-financed, the company’s adjusted leverage could increase from about 3.0x to 5.0x or higher.

Fitch said its outlook on Staples reflects “continued secular headwinds and competitive challenges in the office products category, which have pressured EBITDA since 2012. Fitch believes Staples has limited ability to reverse declines in sales and EBITDA over the forecast horizon, especially given the heightened threat from new entrants in the contract stationer business and despite potential changes from new private equity ownership.”

Fitch noted that the “ongoing digitalization of the workplace has had a negative impact on sales of core office supplies, ink/toner, and paper, which represent around half of Staples volume.” In addition, sales of technology products (approximately 20% of sales) “have been weak due to a slowing replacement cycle and saturation of key products such as laptops and tablets.”

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