Sycamore Wagers $6.9 Billion That Staples Can Thrive Again

  • Transaction would be biggest yet for the private equity firm
  • Staples attempting to re-emerge as seller of business services

What to Watch in the Staples-Sycamore Partners Deal

Sycamore Partners, the private equity firm that still has faith in retail, is making its biggest bet yet.

On Wednesday, it agreed to acquire Staples Inc. for about $6.9 billion in one of the largest retail deals of the year, a wager that the office-supply chain can re-emerge as a modern seller of business services. 

The transaction lets Staples escape Wall Street’s glare and focus on a turnaround plan that includes reducing its retail footprint. But it’s hard to tell how the buyout will fix its fundamental challenges, including the rapid migration of customers to Amazon.com Inc. and slackening demand for traditional office supplies.

“This doesn’t change the industry dynamics or the pressures the retailer faces,” said Seema Shah, an analyst at Bloomberg Intelligence.

Sycamore, saying it was attracted to Staples’ “iconic brand,” is paying $10.25 a share for the retailer, according to Wednesday’s statement. That represents a 12 percent premium to its share price on Tuesday, before reports surfaced that the transaction was close to be being completed.

Staples shares climbed as much as 2.1 percent on Thursday to $10.14 -- still short of the acquisition price.

Low-Ball Bid

At least one large investor was disappointed by the offer. GoodHaven Capital Management co-portfolio manager Keith Trauner, whose firm owns 1.2 million shares, thinks Staples should be valued more like an e-commerce player.

The company has made lots of progress pivoting away from physical stores, with about 60 percent of revenue coming from online orders, he said. A price in the low- to mid-teens would be more appropriate, he said.

“You have private equity coming in right at the peak of pessimism on the entire industry and saying we’re paying a modest premium to the recent trading price and you should be happy,” Trauner said. “The reality is, if we’re right and Staples is approaching an inflection point where the online business is about to start to grow a little bit and offset the decline on the retail side, the valuation should be much higher.”

The deal caps more than a year of turmoil for Staples, which was thwarted in an attempt to make its own acquisition in May 2016. The company tried to buy Office Depot Inc. for $6.3 billion to unify the two largest office-supply sellers, but the transaction was opposed by antitrust regulators.

After its bid for Office Depot failed, Staples Chief Executive Officer Ron Sargent stepped down and the company scrambled for a Plan B.

Under new CEO Shira Goodman, Staples closed stores and sought to recast itself as a source of business services.

“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,” Goodman said in an emailed statement.

Marketing Pivot

Last month, Staples overhauled its marketing to pivot away from its roots -- selling low-priced office supplies at big stores. Its new TV ads don’t show stores, instead focusing on office managers at work.

But sales continued to decline at the company, which began discussing buyout possibilities with private equity firms. Bloomberg reported in May that Staples had rejected a takeover offer from Cerberus Capital Management because it was too low. That left Sycamore in the lead to acquire the retail chain.

Staples Has Its Struggles, But This Buyout Is Cheap: Gadfly

The first Staples store was opened by former supermarket executive Tom Stemberg in Brighton, Massachusetts, in 1986. According to company lore, he was inspired to start the retailer because his typewriter ribbon broke over Fourth of July weekend and he couldn’t find a replacement.

The company, now based in Framingham, Massachusetts, expanded quickly in the 1990s and early 2000s using a tagline “That was easy.” But the digital revolution took a toll on the chain. E-commerce sales hurt brick-and-mortar demand, and many businesses are using less paper, ink and other supplies.

In May, Staples reported that first-quarter sales dropped 4.9 percent from the previous year to $4.1 billion. It shut 18 stores in North America during that period, leaving it with 1,237 locations in the U.S. and 304 in Canada.

Belk Deal

Sycamore, founded by Stefan Kaluzny and Peter Morrow, raised $2.5 billion for its second fund in 2014. The Staples acquisition would be the biggest deal to date for the firm. It previously acquired department-store chain Belk Inc. for $2.7 billion.

The Staples acquisition is slated to close by the end of 2017. Sycamore lined up financing from UBS Group AG, Bank of America Corp.’s Merrill Lynch, Deutsche Bank AG, Credit Suisse Group AG, Royal Bank of Canada, Jefferies Group LLC, Wells Fargo & Co. and Fifth Third Bank. Merrill Lynch and Deutsche Bank served as the firm’s financial advisers, while Kirkland & Ellis LLP provided legal help.

Michael Freitag, a spokesman for Sycamore, declined to comment beyond the statement.

Staples, meanwhile, got financial advice on the deal from Barclays Plc and Morgan Stanley. Wilmer Cutler Pickering Hale & Dorr LLP was its legal adviser.

The debt brings new potential challenges, Shah said.

”The risk is, of course, that sales and margins continue to be under pressure and that the retailer struggles to service its debt,” she said.

Sycamore is known for seeking retail brands and trying to turn them around. But Staples has been striving to shed its retail image. By 2020, the company expects to get only 20 percent of revenue from retail locations, down from about 40 percent now. The rest will be generated by delivery and online sales.

“The Sycamore Partners team shares Staples’ entrepreneurial spirit and long-term vision,” Goodman said in the statement. “This transaction will enable us to drive greater value for our customers and immense opportunity for our business.”

— With assistance by David Carey, and Jonathan Roeder

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