Risk

Staples to Buy Office Depot for $6.3B

Staples pays a 65% premium to acquire its competitor; sets $1 billion synergy target.
Katie Kuehner-HebertFebruary 4, 2015
Staples to Buy Office Depot for $6.3B

Staples is buying Office Depot for $6.3 billion, in a deal that would help the combined office supply retailer better compete with discount stores such as Wal-Mart and online retailers like Amazon.

A Reuters story Wednesday said the deal would like face close scrutiny from antitrust regulators, as “Staples and Office Depot are the biggest remaining U.S. retailers of basic office supplies such as paper and ink toner.” Indeed, regulators rejected Staples’ attempt to buy Office Depot in 1997, citing antitrust concerns.

“This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment,” Staples chairman and chief executive Ron Sargent said in a press release. “We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint.”

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The “cost synergies,” expected to be fully realized within three years of the completion of the acquisition, would be attained through reduced headcount and general and administrative expense reductions; efficiencies in purchasing, marketing, and the supply chain; retail store network optimization; and sharing of best practices. Staples estimates one-time costs of approximately $1 billion to achieve its synergy target.

After the deal closes, Staples’ board of directors would increase from 11 members to 13 members and include two Office Depot directors approved by Staples. Staples’ corporate headquarters would remain in Framingham, Mass. and Sargent will continue to serve as its chairman and CEO.

To fund the acquisition, Staples received financing commitments from Barclays and Bank of America Merrill Lynch for a $3 billion asset-backed credit facility and a $2.75 billion 6-year term loan. Staples also said it would keep its current quarterly dividend at 12 cents a share. It has temporarily suspended its share buyback program to focus on paying down transaction-related debt.

However, “Staples is committed to a prudent capital structure that maximizes financial flexibility and supports a balanced and diverse cash deployment strategy, including the resumption of share buybacks over the longer term,” the company stated.

Under the deal’s terms, Office Depot shareholders would receive $7.25 in cash and 0.2188 of a share in Staples stock for each share of Office Depot at closing. Based on Staples’s closing share price on February 2, the transaction values Office Depot at $11 a share, a 65% premium over the 90-day average closing price of Office Depot shares as of Feb. 2.

Despite the history of the last attempted tie-up of the two companies, “antitrust experts have said a deal could pass muster this time because of an increase in the number of retailers offering the same products,” Reuters wrote. “Nevertheless, Staples said it could call off the deal if authorities ordered divestitures that delivered more than $1.25 billion of Office Depot’s 2014 U.S. revenue.”

The deal was urged by activist investor Starboard Value LP, saying this would lead to greater cost savings, according to Reuters.