Financial Information

• Total Transaction Size: $7.7 Billion
• Implied Enterprise Value: $6.7 Billion
• EV/LTM Revenue: 0.4x
• EV/LTM EBITDA: 14.9x

Transaction Facts

• Office supply superstore Staples, Inc. (Nasdaq:SPLS) announced this morning that it was acquiring competitor Office Depot (Nasdaq:ODP) for an implied enterprise value of $6.7 billion.
• The deal follows last year’s announcement of Office Depot’s merger with OfficeMax, and would leave Staples as the sole major brick and mortar office supply chain. As such, it requires FTC approval – but many observers expect the deal to proceed for the same reasons as last year’s transaction.
• Staples shares increased dramatically yesterday on rumors of the transaction, up 10.4 percent, but since the transaction was announced this morning the stock has lost all of that gain and is down 12 percent overall. Office Depot shares are up approximately 2 percent.

Reflecting a New Reality

• That Was Then, This Is Now: Staples was founded in 1986 by Tom Stemberg and Leo Kahn, who invented the concept of the office supply superstore and were soon emulated by competitors like Office Depot and OfficeMax. Now, if this transaction goes through, Staples will once again be the only office supply superstore chain in America.
• Changing Face of Competition: If the transaction is not approved, Staples will be required to pay a breakup fee to Office Depot of $250 million. But with the FTC’s recent approval of the Office Depot / OfficeMax merger, it’s unlikely for this to be an issue. 20 years ago, a proposed $4 billion merger between Staples and Office Depot was blocked on anticompetitive grounds. But since then the space has seen encroachment from all sides, particularly from online retailers like Amazon (Nasdaq:AMZN) and broader retailers like Costco (Nasdaq:COST) and Wal-Mart (NYSE:WMT).
• A Cautionary Tale: The market disruption that threatens Staples’ and Office Depot’s future is the same one faced by companies in the VAR channel as cloud and utility computing change the economics and dynamics of traditional computer hardware and software resale. We’ve commented in the past about the increasingly prominent role of private equity in these transformations, for example in the cases of CompuCom and Accuvant.
• Cost Synergies – Necessary, but are They Sufficient?: There’s no question that Staples, whom we’ve worked with before, has the operational expertise to extract huge cost synergies. But it remains to be seen whether the company will be able to achieve growth, especially with the myriad of competitors the merged company faces.
• Deluge of Activity: Office Depot’s volume today has hit 136 million, or 28 percent of its float. The stock has entered a new phase dictated by risk arbitrage – if there are any concerns or issues with the transaction, expect the share price to drop significantly and quickly.