Staples LBO Is a Cash Register for Private Equity

(Bloomberg Gadfly) -- "Free cash!" reads a sign somewhere in Framingham, Massachusetts, hanging from the Staples Inc. headquarters. Well, metaphorically speaking. 

In what appears to be a last-resort bid to get out of the public eye and recoup some money for shareholders that have been burned, Staples is reportedly holding buyout discussions with a small number of private equity firms. This lifted the stock about 10 percent. 

"Free" may be overstating things a tad, as a takeover of Staples would come with a roughly $7 billion price tag. But taking into account the cash that even a shrinking Staples throws off and what's still a massive amount of revenue -- only about a third of which comes from the physical stores now -- the company is as ripe as ever for a leveraged buyout.

Let's run through some numbers: With more than $18 billion of annual sales, Staples shares are trading for around 30 cents on the dollar. For comparison, the average U.S. retailer of size is valued on par with its own revenue. The office-supply chain also offers financial suitors strong cash flow: Staples' operations generated more than $900 million of cash in the past year and about $680 million after capital expenditures. It may be losing shoppers, but those figures are more than you can shake a pencil at.

Its balance sheet is LBO-ready, with more cash and higher projected Ebitda than its $1 billion debt load. And the timing is right, as Gadfly's Shelly Banjo explained earlier, because the company is already working to enhance and stabilize its profitability by coming up with new offerings geared toward businesses and the younger people working at them. As is always the case, buyout firms are more rigorous cost-cutters and changes can be made faster as a private company, without having to answer to the market about a few painful quarters during the turnaround process. 

The exit strategy is where it gets tricky -- no matter what magic private equity can work at Staples, will the company really be worth more a few years down the road than it is now? The answer may lie in making another attempt to combine Staples with Office Depot Inc. It's been about 11 months since the two retailers stuck their merger agreement in the paper shredder because the Federal Trade Commission thought the deal would be too anti-competitive (debatable).

The Trump administration is expected to be more open to such mergers, and by the time they're ready to try again, Amazon.com Inc.'s office-supply business may be a strong enough competitor to offset pricing-power concerns -- if it isn't by now. That could add just enough incentive for financial buyers to pick through Staples' bargain bin. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.