Beggars can't be choosers but even so, Staples Inc.'s buyout price is cheap.
The office-supply chain said late Wednesday it's selling itself to private equity firm Sycamore Partners for $10.25 a share, an equity value of about $6.9 billion. It's quite a comedown from the roughly $17 Staples traded for in early 2015 before attempting a takeover of Office Depot Inc. that was ultimately blocked. There's no telling what would have happened to Staples's stock without this deal as it tries to bolster profitability on its own by refocusing on businesses and younger workers. It might have fallen even further -- but that doesn't mean the low price doesn't sting a little.
Using the two firms' calculation of equity value and factoring in net cash, the price amounts to 0.35 times the $18.8 billion in revenue Staples generated over the last year. That's not just cheap for retailers, which had typically commanded closer to 0.9 times revenue in North America. That's one of, if not the, lowest sales multiple on record for a private equity buyout valued at more than $5 billion, according to data compiled by Bloomberg.
The price is even a slight discount to the valuation Staples was willing to pay for its smaller, less-successful rival Office Depot not all that long ago, in a true sign that regulators really got it wrong when they argued a merger would have given the companies too much pricing power. In reality, it was their best chance of survival as Amazon.com Inc. expands more meaningfully into business supplies and targets not just individuals but corporations. This deal also puts a cap on Office Depot's valuation -- which stood at about 0.2 times revenue on Wednesday -- at least until Staples can get itself organized and give a merger another shot.
An eventual combination with Office Depot is probably Sycamore's best chance at generating the kind of business model and stabilized profitability that would drive Staples's valuation above the low levels it's at now. But this investment is not without risks. As my colleague Tara Lachapelle has noted, Staples throws off a lot of cash and has a clean balance sheet. But private equity firms don't have the best track record with retailers, and Amazon is looming.
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