Will Staples Close Its Doors to the Public?
Rumors of private equity interest in in the office supplies retailer seem legitimate, but the size of a potential deal could be an obstacle.
On Thursday, Fortune magazine published a report that several private equity sponsors may be interested in taking Staples (SPLS) private, citing unnamed sources. We consider this transaction to be a low-probability outcome, since Staples' lofty size (roughly $8.2 billion market capitalization and $9 billion enterprise value at current market prices) would make it difficult to acquire the necessary financing, and financial backers may be reluctant to put that much capital at risk in a company that will probably experience significant structural headwinds as a result of increased competition from Amazon.com (AMZN) and other nontraditional office distributors.
Still, we would not be surprised to hear that large private equity firms are carrying out preliminary work on this name. Staples continues to generate a great deal of free cash flow (roughly $1.2 billion in 2011), and acquirers could be enticed by the potential to expand the delivery business, which has historically benefited from a large network of fairly sticky middle-market customers, while redirecting capital away from low-return investments such as the struggling international operations. Assuming $8 billion-$9 billion in debt is issued (approximately 4 times fiscal 2011 EBITDA), low-single-digit top-line growth and operating margins stabilize around 6% over the next decade (more aggressive assumptions than we've committed to in our base-case assumptions), an internal rate of return in the high teens for private equity suitors, and an enterprise/EBITDA exit multiple of 6 times, we arrive at a theoretical leveraged buyout takeover price around $17 per share.
Liang Feng does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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