Staples had sought to remain competitive in the online world by merging with another chain, Office Depot. But that deal was blocked by a federal judge, and the companies abandoned their effort last year.
In its most recent annual report, Staples was frank about the challenges it faced. After noting that it competes with wholesalers and local stationery stores, it reached the heart of the matter.
“We also compete with online retailers such as Amazon.com, mass merchants such as Walmart and Target, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy,” the company said.
Nor did it offer up an especially rosy outlook.
“We are focused on maximizing profitability and reducing risk in our underperforming North American retail and international businesses,” the company said in its annual report, noting that it planned to close about 70 stores in North America this year.
Staples’s board and management decided to sell the company after shareholders had essentially lost faith in the business. Shares of the company were trading near $7 earlier this year, having fallen sharply from about $18 a share just two and a half years ago.
Investors can take some measure of solace from this deal. Sycamore’s offer of $10.25 a share represents a 20 percent premium over the company’s stock price in early April, before initial reports of a deal to sell the company lifted shares.
“Staples’ board believes that this process has led to a transaction which is in the best interests of our stockholders, as well as Staples and its employees,” Robert Sulentic, the company’s chairman, said in a statement.
Staples and Sycamore declined to make executives available for interviews on Wednesday.
For a business on the wane, Staples still sells huge volumes of paper, printer cartridges and electronics. It reported $18.2 billion in revenue last year, down from $21.1 billion five years ago.
And for a company that is closely associated with big-box stores, Staples sells a minority of its goods at bricks-and-mortar locations. Some $10.6 billion of its sales are delivered, compared with about $6.6 billion sold in stores. That suggests that even as stores close and consumers shop online, Staples has a large and potentially profitable opportunity.
For those reasons, the company was an ideal target for a leveraged buyout.
What’s more, Staples has very little debt, just about $1 billion in total. That healthy balance sheet will mean Sycamore — which will borrow much of the money it needs to fund its buyout — will not have to overload the company with a crushing debt burden.
A consortium of banks including UBS, Bank of America Merrill Lynch, Deutsche Bank, Credit Suisse, Royal Bank of Canada, Jefferies, Wells Fargo Bank and Fifth Third Bank are providing financing. The deal, which is subject to shareholder approval, is expected to close by the end of the year.
Ultimately, however, Sycamore will have to figure out what to do with Staples.
“Declining traffic, escalating leases and sluggish consumer spending have made it very difficult to support the debt load that often comes with private equity acquisitions,” Liz Dunn, chief executive of Pro4ma, a retail analytics software company, said in an email. “Staples’ position as an industry leader provides some cover from retail’s meltdown, but there remains too many stores in almost every sector of retail, and office products are hardly immune from disruptive trends.”
If Sycamore follows a traditional private equity playbook, it is expected to have an easy time squeezing out costs, streamlining operations and issuing special dividends that enrich the firm and its limited partners.
And there are other potential deals that could help strengthen Staples.
One option could be to try to revive a merger with Office Depot. That deal was among a number of prominent mergers that were met with opposition in the last years of the Obama administration.
Executives and bankers are betting that the Trump administration will take a more business-friendly approach to antitrust review. But with a dearth of big mergers and acquisitions so far in President Trump’s tenure, that belief has not been tested. This deal is the largest buyout of the year in the United States.
Whatever it does with Staples, Sycamore may have a hard time returning the company to the public markets. Investors who have lost faith in Staples today would need a drastic change in perspective to buy shares in the same company a few years from now. Instead, Sycamore may try to sell Staples to a different private equity firm, or a strategic buyer like Walmart.
For Staples’s chief executive, Shira Goodman, the sale to Sycamore caps a short tenure in charge. She was installed as interim chief executive last year after her longtime boss, Ron Sargent, stepped down after failing to complete the Office Depot deal, and her position was later made permanent.
Barclays and Morgan Stanley advised Staples, and WilmerHale provided legal advice. Sycamore was advised by Bank of America and Deutsche Bank, and received legal advice from Kirkland & Ellis.